The Daily Shot - 12/1/14
- From: "The Daily Shot" <thedailyshotletter@xxxxxxxxx>
- To: <thedailyshot@xxxxxxxxxxxxx>
- Date: Tue, 2 Dec 2014 01:22:28 -0500
The Daily Shot™
Greetings,
After years of stagnation, China’s stock market is finally picking up steam,
driven primarily by the Hong Kong link-up. The Shanghai composite broke through
2700 yesterday. As global money managers reallocate to this previously
unavailable marketplace, these shares will continue to benefit.
Source: Investing.com
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More signs of disinflationary pressures are popping up in various markets. For
example the South Korean CPI is now running at 1% YoY.
Investors and central banks are faced with the realization that this is a
global phenomenon and domestic monetary policy will have to be far more drastic
than in the past to have any impact. Here is the World CPI Proxy (YoY) – a
pattern that’s starting to look quite similar across various nations (it’s what
I call “disinflation globalization”).
Source: @GaveKalCapital, via @georgepearkes
That’s why a number of central banks who tried to raise rates after the
recession found themselves “whipsawed” by global trends, over which they have
very little influence. The Fed does not want to repeat that mistake.
Source: @themoneygame
_____
Switching to Europe, German manufacturing is now in contraction mode (PMI <
50). Not a great pattern here.
_____
UK mortgage lending is continuing to moderate, giving the Bank of England
plenty of room to delay the first rate hike.
_____
10yr forward 10yr swap rates in the euro area have converged with those in
Japan, as the market now fully expects the “Japanification” of the Eurozone.
Source: @acemaxx, @MorganStanley
_____
The ECB policy is favoring investment-grade assets (ABS, covered bonds, and
possibly other types of IG assets). That’s driving the divergence between IG
and HY fund flows in the euro area.
Source: Credit Suisse
_____
The US dollar fell today, giving commodities a bit of breathing room. Crude
oil rallied sharply from its five-year lows. But markets remain skeptical of
any stabilization in crude and investors are trying to cut any direct or
indirect exposure to energy. All of a sudden energy risk is viewed as a new
form of subprime mortgages. Here are some of the direct effects of energy
position cutting.
1. Russian 5-yr government bond yield is pushing toward 11%.
Source: Investing.com
2. Venezuela 2-yr government bond yield is above 33%. Ready for “restructuring”?
Source: Investing.com
3. Where is much of the growth in US rail business coming from? It’s pretty
clear from the chart below.
Source: Yardeni Research, h/t @ukarlewitz
That straight-line growth in chemicals & petroleum car loadings is likely to
“change slope” next year. That’s why rail shares took a beating today (red =
S&P500, blue = UNP, black=NSC, purple = CSX).
4. High yield bonds sold off, as credit exposure in energy and energy-related
sectors is reduced. It’s interesting to see bank debt (red) still holding while
HY corrects (blue). If this continues, bank debt will follow HY lower.
5. Infrastructure and other MLP portfolios also came under pressure.
Source: Investing.com
_____
We are also seeing some indirect effects that reflect the “risk-off” sentiment.
1. Small caps continue to underperform.
2. And BDCs are under pressure again.
Source: Investing.com
It’s a bit surprising, given that many smaller and mid-size firms will benefit
from lower energy prices.
_____
In fact the benefits of lower energy costs are already making their way through
the economy.
1. US manufacturing costs are starting to decline. Remember, it’s not just fuel
and heating costs. It’s also cheaper transport (lower travel and shipping
costs) as well as cheaper PVC, nylon, polyester, foam, etc.
Source: Investing.com
2. We also see some signs of consumer spending improvements, albeit still quite
tepid.
_____
One more item worth mentioning about commodities: the declines are not just in
energy. Prices have eased across the board.
Source: @WSJMoneyBeat
_____
Now some food for thought. It’s interesting to see which companies dominated
the market (in terms of market cap) at different periods. Late-90s = tech boom
(Microsoft), followed by the credit boom (growth came from GE Capital),
followed by the energy/commodity boom (Exxon), followed by the mobile tech boom
(Apple). It’s not precise of course, but the pattern is there.
Source: @RobinWigg
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