The Daily Shot - 12/16/14
- From: "The Daily Shot" <thedailyshotletter@xxxxxxxxx>
- To: <thedailyshot@xxxxxxxxxxxxx>
- Date: Wed, 17 Dec 2014 02:22:37 -0500
The Daily Shot™
Greetings,
Once again we start with Russia, where the currency continues to fall in spite
of the central bank intervention. At some point today we approached 100 rubles
to one euro. The currency later stabilized - about 7% weaker than yesterday.
The 5-year government bond yield is now near 18%. I don’t see how any economy
can withstand rates this high. At these levels any private sector lending or
bond activity grinds to a halt.
Source: Investing.com
Moreover, there is the issue of foreign-currency-denominated liabilities. Some
point out that the problem is mostly in the private sector, so the fiscal
situation should be OK. Nonsense. Most of this debt will become the
government’s problem shortly as bailouts follow. It’s the only way for Moscow
to save the banking system and preserve some key industries. This is going to
get ugly.
Source: @AleGrindal @NDR_Research @NDREurope
That is why the Russian sovereign CDS continues to widen.
5yr sovereign CDS spread:
Source: @lebullmarche
_____
With the Russian economy unraveling, the Ukrainian 2015-maturity
dollar-denominated bonds now trade at 62.5% of par, giving them a yield of
about 82%. These bonds are not going to “mature”.
Source: @RobinWigg, FT
_____
Brazil’s currency has been under pressure as well, in part due to
Russia-related risk aversion.
And Brazil’s sovereign CDS spreads widened also (chart below shows probability
of default given 40% recovery). Feels like 1998?
Source: DB
_____
In the Eurozone, the Germans continue to oppose broad quantitative easing.
Reuters: - "You cannot simply apply the same formula in Europe that has enjoyed
success in the U.S. or in Japan," Weidmann [the head of Bundesbank] told a
conference in Frankfurt, commenting on the prospect of further money printing
to buy assets such as state bonds.
And Weidmann may try to argue that the situation in the Eurozone is
stabilizing. German economic sentiment suddenly showed some improvement lately.
Source: ZEW
The markets don’t buy it and are pricing in deflation and asset purchases - as
the 10-yr Bund yield drops below 60bp.
Source: Investing.com
And other data from the Eurozone remains subpar. For example, French
manufacturing sector has been in contraction mode (PMI < 50) since last summer,
_____
In the UK disinflationary pressures are worsening, as the CPI unexpectedly
drops to 1%. There is no chance that the Bank of England will do anything with
rates in 2015 if this trend persists.
_____
Speaking of disinflation, the 5-year breakeven inflation expectations in the
United States dropped to the lows not seen since 2009.
The treasury curve continues to flatten as a result. The chart below shows the
30-yr to 2-yr yield spread.
_____
US economic data has been mixed, as growth in manufacturing has slowed
markedly.
And residential housing construction can’t seem to pick up momentum as
construction permits growth remains anemic.
This is in contrast with improved US consumer sentiment and strong industrial
production trend (chart below shows YoY growth in industrial production).
_____
Based on at least one measure, hedge fund leverage is now at pre-recession
levels. We could see more volatility as some of this gets unwound.
Source: @Eurofaultlines, Merrill
_____
Some of the reasons for the unwind (from above) could be the deterioration in
sub-investment-grade corporate credit.
blue=leveraged loans, green=HY bonds, red=BDCs:
Source: Stockcharts
_____
Now some food for thought – 3 items:
1. Hong Kong is now the second largest market for IPOs – larger than NASDAQ,
London, etc.
Source: @Dealogic
2. Wonder why college costs are so high? Thank the US government – at least in
part. Massive amounts of cheap student loans allowed colleges to raise prices
without a significant impact on demand.
Source: @RudyHavenstein, advisorperspectives.com
3. Bank formation in the US is amazingly weak relative to pre-recession rates,
as the FDIC license approvals have slowed.
Source: @WSJGraphics
_____
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