The Daily Shot And Data - October 5, 2016

By Staff

Wednesday, October 5, 2016 7:39 AM EDT

1. We start with the Eurozone where the ECB brought up the topic of "taper." When Bernanke first mentioned the idea in the US in 2013, the bond markets went into a tailspin in what was later called the "taper tantrum." The ECB, however, never made it a secret that the party will be over sometime in early 2017. It's quite clear that further QE efforts will face the law of diminishing returns while creating all sorts of market distortions and moral hazards.

Source: WSJ; Read full article

The euro spiked on the news.

2. Bond yields in the Eurozone (and globally) rose in response.

Source: Investing.com

3. Italian longer dated bonds sold off sharply, hit by the taper news as well as being crowded out by the country's new 50-year bond issuance. The market was happy with this new security yielding less than 3%.

Source: WSJ; Read full article

4. Italy's upcoming referendum also remains a risk because a "no" vote would generate significant political uncertainty. That's why we continue to see the Spain-Italy bond spread move deeper into negative territory.

1. Turning to the UK, the British pound slumped to a 31-year low on renewed worries about Brexit. The reality is setting in that the so-called "hard Brexit" is quite possible. The weaker pound is in effect compensating for the potential EU tariffs.

2. The markets are predicting that the BoE will be dealing with some inflation soon, as imports become increasingly expensive due to the currency weakness.

3. The UK's construction activity surprised to the upside, driven by residential housing demand.

Source: Markit Economics, Chartered Institute of Procurement & Supply

Australian bond yields continued to rise - this time driven by the ECB.

1. Turning to Japan, dollar-yen rose sharply as the Fed rate hike expectations for December remain high (above 60% probability).

2. Japan continues to demand dollar-yen cross-currency swaps to hedge dollar assets.

Source: Deutsche Bank, @NickatFP, @joshdigga

3. The nation's service sector activity declined to the lowest level since 2014. At least a portion of that was due to the recent typhoons.

Source: Markit Economics

4. Japan's household confidence unexpectedly rose last month.

Does the above mean we should finally see an increase in spending?

Source: Goldman Sachs, @joshdigga

Elsewhere in Asia, the South Korean headline CPI unexpectedly jumped. Is this the end for deflationary concerns?

1. In emerging markets we see Brazil's inflation continuing to move lower, opening the door for rate cuts.

2. As discussed before, Brazil desperately needs lower interest rates as credit conditions remain tight and economic activity hits a wall. The latest monthly industrial production decline was the sharpest in years.

3. India's central bank unexpectedly cut interest rates. Given that Patel is known for his hawkish views, some have suggested that the RBI has been (in part) pressured by the Modi Administration. More cuts to come?

Source: Bloomberg; Read full article

Indian bond yields fell sharply in response.

4. Mexico's fixed investment fell much more than expected. This was a bit surprising given the demand for manufacturing infrastructure.

5. In the Gulf, Oman's stock market took a hit, following other regional shares lower.

6. The differential between the Egyptian pound official exchange rate (the peg) and the forward rate continues to widen. This devaluation could be bigger than the previous one. The chart below shows the number of Egyptian pounds one US dollar buys.

Source: Bloomberg

7. Russian inflation continues to fall. While the central bank poured cold water on further rate cuts, the chart below suggests otherwise.

1. In US fixed income markets, rates are rising on the long end (the 30yr treasury yield), and on the short end: (the 1-week LIBOR).

2. At the same time, HY spreads continue to tighten as oil prices rise.

1. In the equity markets, shares of utilities remain under pressure as treasury yields rise.

2. High-beta shares, which were out of favor until recently, have been outperforming.

Source: @MktOutperform; Read full article

3. The Morgan Stanley global correlation index is at multi-year highs.

Source: @acemaxx, @MorganStanley

1. Switching to commodities, the crowded trade in precious metals was being unwound on Tuesday as silver and gold tumbled. Higher rates and a stronger dollar will do that. The ECB "taper talk" isn't helping either.