The Daily Shot And Data - January 22, 2016

By Walter Kurtz

Friday, January 22, 2016 5:50 PM EST

Global equity and other "risk" markets remain addicted to stimulus without which all the ugly "withdrawal symptoms" kick in. The market "dysfunction" created in part by the Fed's drip withdrawal has been quite violent, and many would argue irrational. However on Thursday, Mr. Draghi gave the markets a bit of what they've been craving.

Source: Mario Draghi (press conference)

Crude oil, which is now the key driver behind equity and credit markers, bounced on the news. It's now some 11% off the lows as short-covering kicked into gear.

Source: barchart

Global equity markets followed, with the Nikkei up 5.5% in Friday trading.

While this bounce is impressive, the near-term fundamentals behind WTI remain terrible.

1. US production shows no signs of cracking.

2. US crude oil imports are elevated - this is the last thing US crude producers need now.

3. Gasoline inventories in the US are at record highs.

4. Iran is gearing up ...

If the equity markets remain tied to crude oil (a correlation which defies logic), the rally is likely to be short-lived.

There has been some debate regarding the parabolic rise in shares outstanding of USO - an ETN that tracks crude oil.

Source: Tyler Neville

A couple of observations regarding this increase.

1. In dollar terms the growth hasn't been nearly as sharp. If someone wanted for example to keep a fixed dollar exposure to crude oil (and this is a terrible instrument for that), she would be forced to buy more shares as prices fall. 2. At least a portion of the share creation seems to be driven by the demand from short-sellers (who borrow the shares to short). Therefore the unwind may not be as dramatic as some have suggested.

In spite of the bounce in crude and the equity markets, several EM currencies remained under pressure.

1. The ruble hit another record low.

Source: Investing.com

2. The Kazakhstan tenge followed the ruble to new lows as well.

Source: barchart.com

3. The Colombian peso hit another record low.

Source: Investing.com

4. And so did the Mexican peso. Those who are planning a vacation in Mexico, one dollar now buys nearly 19 pesos. Enjoy!

Source: barchart.com

It's funny - a couple of years ago any one of the above currency events (record lows) would have been big news. Today it's an everyday occurrence.

In other emerging markets here are some of the items we are tracking.

1. As discussed here numerous times, Venezuela is approaching "d-day".

Source: WSJ

2. The interbank Hong Kong rates (HIBOR) rise on capital outflows (out of "greater China"). HIBOR is higher than LIBOR now.

Related to the above, Hong Kong shares now trade at distressed levels - the selloff seems overdone.

Source: @DavidInglesTV

3. China overbuilding continues. Some of these fancy buildings will be taken over by Beijing (when the builders fail) and used for "social housing".

Source: @vexmark

By the way, following up on yesterday's China interbank repo chart, the 2-week rate remains elevated in spite of the injection of liquidity.

Below are some of the latest economic trends in the United States.

1. Inflation expectations continue to decline to levels not seen since early 2009. Here are the 5y5y forward and the 10yr breakeven rates. It's not clear how the Fed can possibly justify raising rates in this environment. Once again, as both Carney and now Draghi strike a decisively dovish tone, the Fed is alone in its "normalization quest".

2. Monetary conditions have already tightened sufficiently based on the shadow Fed Funds rate.

Source: FRB, h/t Alex

3. The Philly Fed manufacturing survey shows that new orders have stabilized while inventories continue to shrink.

4. Have the US initial jobless claims bottomed out or is this a bad seasonal adjustment around holiday hires? More on this later.

Now let's look at some trends in US credit markets.

1. Corporate HY spreads are at 2011 levels - the height of Eurozone crisis (when people feared that Italy will fail and bring down with it the global financial system). The HY bond market is frozen with very little activity outside of ETF flow names. However, outside of the resources & energy names, it's hard to argue that fundamentally credit quality has deteriorated dramatically. This looks like a buying opportunity.

2. The market will continue to increase the differentiation between the weakest and the strongest names. This chart shows the CCC to BB spread. The second chart shows where this differentiation is coming from.

Source: @acemaxx, @FT

3. Fund flow dynamics have been terrible for both HY bonds and leveraged loans.

Source: @lcdnews, @mfuller2009

4. US auto finance has been quite frothy lately - this may be coming to an end (and with it will go record auto sales).

Source: @valuewalk

5. US longer-dated swap spreads are deep in negative territory as banks tighten the usage of their balance sheets for low margin business. This is linked to banks' unwillingness to provide repo financing, making the warehousing of treasuries relatively expensive - thus the negative swap spread arb persists.

In the equity markets we have a couple of items to cover.
1. What would you most like to see companies do with their cash? Here is the latest survey from BAML. Weak market dynamics indirectly puts pressure on CAPEX.