The Daily Shot - 12/15/14
- From: "The Daily Shot" <thedailyshotletter@xxxxxxxxx>
- To: <thedailyshot@xxxxxxxxxxxxx>
- Date: Tue, 16 Dec 2014 02:33:27 -0500
The Daily Shot™
Greetings,
OK, here we go again. Those who liked crude oil at $65 will really like it at
$55, as capitulation in the energy markets continues.
To help matters, a somewhat “spooky” economic report came out today showing an
unexpected spike in capacity utilization in the United States. This is a clear
indication of US economic strength - we haven’t seen capacity utilization like
this since before the recession. But some have interpreted this report as an
increased potential for price pressures and an earlier hike by the Fed. Could
this drive the dollar even higher?
For reasons described below, price pressures are unlikely. Nevertheless this
report, combined with renewed pressure on oil, was enough to reignite another
round of what we called “taper tantrum” in 2013. Except this time it feels more
like 1998.
The ruble collapsed – shedding some 13% in a matter of a few hours. It is now
over 81.5 rubles per euro and 65 per US dollar.
At some point during the day, with the ruble in freefall, Russia’s central bank
decided it had enough of this. It hiked the benchmark rate all the way to 17%.
Here is how the ruble reacted.
This tells us that in spite of Moscow’s blaming those evil Western speculators
for the ruble’s woes, the amount of speculative activity is fairly limited. The
muted response to the rate hike tells us that the ruble’s collapse is about
panicked capital outflows – depositors unwilling to hold the ruble no matter
what the overnight deposits pay.
Note that at these exchange levels the government will have to step in and bail
out dozens of corporations and banks who have significant hard-currency
denominated liabilities (and ruble denominated assets). This is going to get
ugly. Putin’s big piggybank (national funds built up over the years of oil
boom) will get drained rather quickly. That’s why Russian sovereign CDS spreads
have spiked.
5yr CDS spread = 490
Source: @joshh031
But the hit wasn’t limited to Russia, as currencies of other EMG nations took a
beating.
1. Brazilian real hit a decade low (chart shows USD appreciating against BRL):
2. The Turkish lira revisited levels not seen since the 2013 “taper tantrum”:
3. The South African rand also touched new lows:
4. Indonesian Rupiah hit a 16-year low:
5. And while no longer very meaningful, the 2yr Venezuela government note yield
is now at 75%:
_____
While some are looking for a bit of stabilization tomorrow, the latest news out
of China is not helpful. China’s manufacturing sector is in contraction mode
again.
_____
Furthermore, disinflationary pressures continue to spread globally.
1. The broad commodity complex continues to fall.
Source: barchart
2. The Swiss PPI fell more than expected in part due Swiss franc strength – and
of course on cheaper energy.
3. India's wholesale inflation fell to zero – also on lower fuel prices. This
should be constructive for Indian economy as low inflation will also bring down
interest rates.
4. In the United States the breakeven inflation expectations fell to a 4-year
low. I just don’t see the Fed hiking rates in this environment – no matter what
capacity utilization does.
_____
In credit-land US leveraged finance markets are sputtering.
1. BDCs continue to come under pressure. Way too much BDC capital out there
chasing more deals, as risk/reward characteristics worsen. And here comes the
correction.
blue=S&P500, red=BDCs
2. The high yield market is on track for the worst annual performance since 08.
Source: @NickTimiraos
3. The energy component of HY market is now trading a distressed levels –
spread of over 1,000bp.
Source: @toby_n, @cigolo
4. And leveraged loans are trading lower as well. An opportunity?
Source: SoberLook.com
_____
Can crude oil bounce from here? Long-term technicals seem to point to low 50s
as the potential floor for crude oil. It’s hard to pull the trigger on
something like this, but a bounce (albeit a temporary one) is now quite
possible.
Source: @erikholmwsj @KevinKingsbury
This “bounce theory” is supported by a sharp spike in oil implied volatility.
Source: barchart
Moreover there is increased public awareness/interest in falling oil prices.
Such awareness in my experience is often an indication of a trend reversal.
Here is the Google Trends search frequency (relative scale) for "price of oil":
Source: Google Trends
_____
Finally some food for thought. From Mashable: “Global temperature departures
from average for the Jan. through Nov. period since 1880, along with the linear
trend line.” Ouch.
Source: @nycjim @afreedma
_____
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