Greetings,

1. We begin with emerging markets where foreign funds continue the chase for yield. Here is Taiwan's 10yr government bond (63bp). 

Dollar-denominated emerging markets bonds are outperforming US HY bonds and the S&P 500 year-to-date as EM debt ETFs' shares outstanding continue to climb.

Source: Ycharts.com

2. Mainland China and Hong Kong property price divergence continues, with HK home prices declining while Mainland's prices marching higher.

Source: S&P Global

Source: Goldman Sachs

3. Mongolia's central bank jacks up rates to 15% to stem the currency collapse. The second chart below shows how many Mongolian togrog one US dollar buys.

4. Argentina’s Supreme Court upset Macri's efforts to shrink the government's subsidies for public utilities - one of the moves aimed at shifting toward a market-based economy.

Source: @WSJ

5. Chile's first economic contraction in 6 years was cushioned by fiscal spending. The quarterly GDP decline was lower than expected.

6. The Polish economy is starting to sputter as industrial output drops and fiscal risks increase.

7. According to the US Department of Energy, "crude oil disruptions in Nigeria increase as a result of militant attacks".

Source: @EIAgov 

1. Speaking of crude oil, the Saudis have ramped up exports of oil and refined products.

Source: @markets

There seems to be some maneuvering by the Saudis ahead of the expected OPEC/Russia output freeze, as the nation's production may hit a record this month.

Source: Reuters, Twitter

2. Nonetheless, Brent crude rose above $51/bbl this morning.

3. We also see a big rally in US gasoline futures.

Source: barchart.com

4. Oil and inflation expectations are diverging again.

Source: Bloomberg Terminal; Function "HMS"

5. Here is US crude oil production forecast from the Department of Energy.

1. Continuing with the US, the Philly Fed manufacturing report looks bad. While the headline figure increased, the new orders index shows a contraction while employment weakens to a 7-year low.

2. The US consumer seems increasingly jittery about spending. This trend is contributing to the tepid economic expansion and perhaps to its extended duration.

Source: @Callum_Thomas, Deutsche Bank

3. The trade-weighted US dollar index has been declining, contributing to easing financial conditions (second chart below).

4. According to Bloomberg, "economists see a higher probability of a 2016 Fed rate hike" than the futures market. 

Source: ‏@M_McDonough 

1. Turning to the UK, the nation's retail sales exceed forecasts with no visible Brexit effect thus far. Explanations include (h/t  ‏@slapdash__ , @CustodianThe1) :

• Foreigners shopping in the UK as the weak sterling makes everything cheaper for visitors.
• UK shoppers want to buy up stuff before inflation (driven by weak GBP) kicks in.
• Nice weather brought all the shoppers out.
• As the pound weakened, vacations abroad became expensive. Brits, therefore, vacationed in the UK.

Perhaps.

The third chart below shows the retail sales index (not the year-over-year changes).

Source: Goldman Sachs

2. Given the above, is it time for some soul searching for the speculative accounts who are massively net short the pound? GBP/USD rose on Thursday.

1. Turning to the Eurozone, Portugal's government bond yields rise further on ratings concerns.

2. Spain’s national debt debt-to-GDP ratio reaches the highest level in over a century.

Source: RT

3. Given the above, it's ironic that the Spanish 10-year bond yield hits a record low on renewed hopes for a solution to the post-election political impasse. 

4. Related to the above, the Spain - Italy bond spread is back in negative territory.

5. Here is the decomposition of a euro-based investor buying treasuries and hedging the currency risk (which results in negative yield). The "orange" contribution is the cross-currency basis (second chart below).

Source:  ‏@financeinottawa

6. About 65% of Germany's $1.1 trillion government debt has a yield of less than negative 0.4% (ECB’s minimum yield to qualify a bond for QE purchases). The German yield curve is shown below.

Moreover, the German government now plans to reduce its bond issuance next year by 11 percent, creating an even bigger deficit of QE-qualifying paper. The ECB will have no choice but to load up on Italian and Spanish bonds above the targeted levels. 

Source:  ‏@acemaxx, Bloomberg Terminal; Function "GC"

7. The ECB minutes show concern over the vulnerability of the area's banking system. Every time we get market jitters, Deutsche Bank, UniCredit, and other banks come under severe pressure.

Source: ECB

8. Parts of the Eurozone remain in deflation as Slovakia's CPI moves deeper into negative territory.

9. French unemployment rate fell below 10% for the first time since 2012.

1. Turning to US equity markets, here is the S&P500 100-day rolling historical volatility since the beginning of the year.

Bloomberg Terminal; Function "HVG"

2. US farmers are most leveraged since the 1980s (the recent collapse in grain and meat prices has not helped). This doesn't bode well for firms like Deere (white line in the second chart below).

Source: @markets

Source: Bloomberg Terminal; Function "HMS"

3. The Justice Department indicated that it will end the use of private prisons. Prison operators (structured as REITs) took a beating (down 35-40% on the day). 

It's interesting that bets against prison operators were placed in the options market starting back in July.

Source: @markets

4. Speaking of REITs, they have been selling off in the last few days, although still up over 13% YTD.

Source: Ycharts.com

5. US consumer discretionary shares underperform.

Source: Ycharts.com

6. According to FactSet, "the top 50 holdings of the top 50 hedge funds underperformed the S&P500 in Q2". 

Source: @FactSet 

In credit markets, here is the S&P Global forecast for US HY defaults for next year. Much (though not all) of this trend is driven by energy and natural resource names.

Source: S&P Global

Source: S&P Global

In the funding markets, institutional money market AUM and term deposits at foreign banks decline as US money market regulation looms. Treasurers are often not permitted to put cash into instruments that have a floating NAV - which is what will happen to prime money funds. Prime money funds, on the other hand, bought CDs or CP from foreign banks who need dollars. As institutional treasurers pull out of prime funds, foreign banks lose this source of dollar funding.

Source: Deutsche Bank

1. In commodity markets, the WSJ discusses the trouble with US cattle futures. We've seen massive price swings in this market with no apparent news events.

Source: @WSJ

2. US milk futures are following New Zealand prices higher.

Source: barchart.com

3. Palladium rallies on strong vehicle sales in China (supposedly) and softer US dollar. Apparently, some investors have been rotating out of gold into palladium.

Source: barchart.com

Turning to Food for Thought, we have 5 items today:

1. Net migration now accounts for nearly half of US population growth.

Source: Goldman Sachs

2.  Unauthorized migration into the US vs. the unemployment rate.

Source: Goldman Sachs

3. Coal will remain a major source of electricity for decades to come, although its usage is not expected to grow much.

Source: ‏@WSJGraphics

4. Bookstore sales are unexpectedly improving.

Source: @StatistaCharts

5. "Peak oil" may be driven by falling demand rather than supply. Perhaps.

Source: ‏@FTMarkets

Have a great weekend!