The Daily Shot; July 21 - Global Macro Currents

By Walter Kurtz

Thursday, July 21, 2016 4:04 AM EST

Greetings,

We would like to start by thanking Danielle DiMartino Booth for her support.

Let's begin with the UK where several recent surveys provide a better window into the impact of Brexit.

1. Here is the UK Markit Household Finance Index, showing how UK residents view their finances over the next year.

Source: @MarkitEconomics

2. The UK corporate surveys look awful. According to Barclays the greatest impact on the economy will come from declines in investment.

Source: Barclays

3. The EU has now become the greatest concern for the British - even bigger than immigration.

Source: ‏@ECONdailycharts, Ipsos MORI

4. Next, we have some demographics on the EU Referendum voters.

Source: Morgan Stanley, @joshdigga

Source: ‏BBC, @MaxCRoser

Source: Morgan Stanley, @joshdigga

5. Switching to the UK's economy, the May unemployment rate was the lowest since 2005. Will the trend continue?

6. On Wednesday, the UK sold 20-year gilts at a record low yield. While this reduces the interest expense for the British government, it is a disaster for pensions trying to fund the liabilities.

Source: @FastFT, ‏@acemaxx

7. Related to the above, here is the UK-US 5yr government bond spread.

Source: Credit Suisse

8. The markets still expect an August rate cut from the Bank of England. Is it possible that the BoE will disappoint? After all, with the pound devaluation, inflation could become a concern.

Source: ‏@CapEconUK

Turning to the Eurozone, the area's credit impulse (change in new credit as % of GDP) and new loan growth are holding up for now. Economists are watching closely to see if the markets' focus on European bank capitalization will stall or even reverse credit expansion.

Source: Morgan Stanley, @joshdigga

2. According to Morgan Stanley, the Eurozone's ongoing decline in unemployment is likely to stall.

Source: Morgan Stanley, @joshdigga

3. The next chart shows belt-tightening vs. fiscal stimulus among euro area governments this and next year.

Source: Morgan Stanley, @joshdigga

4. Increasingly, less government debt is eligible for the ECB QE purchases (the yields are too low). The first chart shows the rising proportion of German debt that is ineligible (yellow). The second chart compares eligibility percentages across different countries. The ECB may be forced to buy more Spanish and Italian debt than originally planned.

Source: UBS, @Schuldensuehner

Source: ‏@WorthWray, @FT

5. Related to the above, here is the German 5yr government bond auction over time. Yes, Germany is charging 0.5% per year to hold your euros for five years.

6. The euro traded down on speculation of increased stimulus from the ECB. For now, however, such an outcome is unlikely - the ECB stimulus program is already massive.

Source: ‏@ecoeurope, @rcurtisspalding

7. Eurozone consumer confidence slipped further this month, in the wake of the Brexit vote. According to Capital Economics, this suggests that Eurozone's consumer spending may slow.

Source: ‏@CapEconEurope

Next, we turn to emerging markets, where we are getting more scary headlines from Turkey: a three-month "state of emergency".

Source: Reuters

The Turkish government went on Twitter to tell the world the "state of emergency" isn't going to be like the "martial law of the 1990s". Perhaps.

Source: Twitter

We also got this news from S&P.

Source: Marketwatch

The Turkish lira sold off further, hitting record lows (the chart shows that one US dollar can now buy a record number of lira).

Turkey's stock market remains under pressure. Dollar-based investors (second chart below) got hit even harder.

Source: Google

The Turkish government yield is grinding higher, although bonds remain resilient relative to their performance earlier this year.

Separately, Turkey's consumer confidence was already weakening prior to the coup attempt.

1. In other emerging economies, India's retail loan growth has been quite strong. Consumption is becoming a larger component of the economy.

Source: Morgan Stanley, @joshdigga

2. Paraguay's central bank cut rates again.

3. Brazil's financial conditions index shows significant easing but remains in the "restrictive" territory.

Source: Goldman Sachs

4. The Nigerian naira took the biggest hit since the peg was removed (the decline would have been worse if the central bank didn't intervene). The FX forwards point to further devaluation.

Chart shows the number of naira one dollar buys.

5. Here is the monetary policy stance/bias across Eastern Europe/Middle East. Note that the contractionary stance in some countries is the result of defending the currency.

Source: Morgan Stanley, @joshdigga

6. The weekly inflow into EM funds was the largest since 2013.

Source: @IIF

7. Separately, the Global Container Throughput Index shows improvement. This suggest stabilization in global trade.

Source: @Callum_Thomas

1. Switching to China, here is a great 3-chart summary of the nation's recent economic trend from Barclays.

Source: Barclays

2. China's retail sales growth seems to be moderating.

Source: Morgan Stanley, @joshdigga

3. S&P published a shocker report: "$62 trillion in total global credit by 2020", dominated by China. In fact, according to this study, China's credit outstanding will be nearly double that of the US.

Source: ‏@lcdnews

Japanese business survey (the Tankan Report) does not look too promising. Does this give the BoJ more ammunition to accelerate QE or even do something more drastic (like "helicopter money")?

Source: Goldman Sachs

2. The currency markets are indeed betting on more BoJ stimulus as the yen continues to weaken (the dollar buys increasingly more yen).

Source: ‏barchart.com

What's up with Ontario's rising electricity costs? This trend is especially hurting rural communities (see explanation below the chart).

Source: @alex_macdonald

Source: globalnews.ca

Back in the United States, the futures-implied probability of a rate hike in 2016 is now above 50%.

Source: CME

Supporting the above expectations, here is the Citi US Economic Surprise Index.

Source: Yardeni Research

1. We now look at the US energy markets where gasoline inventories unexpectedly rose. This market remains oversupplied.

2. The next chart shows the US regional gasoline inventories. The East Coast is awash with gasoline.

3. US crude oil imports are elevated relative to last year, as imports to the Northeast are often cheaper than transporting from within the US.

4. US crude oil production seems to have stabilized for now. The small bounce, however, is due to the Alaska production - the lower-48 is still in decline.

Source: EIA, h/t @sunneversets79

Here are some key trends in other commodity markets.

1. Zinc.

Source: barchart.com

2. Uranium (longer-term price trend).

Source: barchart.com

3. Cattle futures.

Source: barchart.com

4. It was a tough day for precious metals on stronger US dollar. Here is silver.

Source: barchart.com

1. In the equity markets, VIX hit another low for the year.

Source: barchart.com

2. As discussed before, the VIX curve keeps steepening (higher contango), which tends to indicate higher risk appetite.

Source: ‏@VixCentral

3. Bullish sentiment is returning to the equity markets.

Source: Yardeni Research

4. Separately, Valeant's 2 key drugs finally cleared FDA hurdles, sending the whole biotech/pharma complex higher.

Source: Ycharts.com

1. In credit markets, the Merrill US HY Bond Total Return Index hit a new record.

2. The investment grade CDX (index of corporate credit default swaps) spread tightened below 70 bps, reversing all the corporate credit selloff between last August and this February.

Source: ‏@boes_

1. In private markets, here are the median EBITDA multiples of US M&A (including PE buyouts). Yes, valuations are higher than what we saw before the financial crisis.