The Daily Shot - 12/18/14
- From: "The Daily Shot" <thedailyshotletter@xxxxxxxxx>
- To: <thedailyshot@xxxxxxxxxxxxx>
- Date: Fri, 19 Dec 2014 02:35:48 -0500
The Daily Shot™
Greetings,
I continue to monitor market signals out of China for signs of easing by the
PBoC. But just the opposite has been taking place so far. China's short-term
rates rose, defying expectations. The 7-day repo rate – a liquid money market
product – has suddenly increased after months of low volatility.
Source: Chinamoney
And SHIBOR rates rose across the curve.
Source: SHIBOR
It’s not clear why the PBoC is letting rates rise other than as an attempt to
deflate some of the credit bubble. This will certainly start the snowball
rolling downhill but could seriously damage growth.
In another development, Beijing has allowed the yuan to weaken – which should
also shake out some currency speculation. Currency traders in China
traditionally tried riding the yuan gradual appreciation, often transacting via
fake “exports” via Hong Kong.
Chart shows USD appreciating against CNY
The question now is how much depreciation will be allowed? Can Beijing tolerate
being pegged to the rising dollar for much longer while the Japanese yen
declines?
Meanwhile the China’s stock market has taken off again, touching multi-year
highs – seemingly ignoring the spike in interest rates.
_____
Switching to Japan for a moment, the 10-year government bond yield hit 35 basis
points today. Amazing.
Source: Investing.com
That’s what happens when the central bank takes the bulk of new-issue
securities out of the market.
BOJ's holdings of government securities:
Source: BOJ
_____
In the Eurozone we have some positive news for a change. The IFO survey results
that came out today support this week's ZEW report indicating stabilization of
economic/business sentiment in Germany. Bundesbank ‘s Jens Weidmann may well
use these results to criticize the ECB’s contemplated QE program. This debate
is going to heat up next month.
_____
The Swiss central bank (the SNB) set the target benchmark rate at negative 25bp
to reduce the upward pressure on the Swiss franc. If the ECB can do it why not
the SNB?
It worked to an extent, but the impact was quite limited. There is just too
much demand for the Swiss franc, particularly from the Eurozone (in part driven
by the situation in Greece).
Source: Investing.com
_____
The Nigerian stock market collapsed as the currency (naira) trading was curbed
to stem outflows. Foreign investors (who loved Nigeria as a “frontier” market)
are becoming trapped in what amounts to a “roach motel”. The capital can come
in but getting it out now is another story.
Source: @RobinWigg
Some may remember this chart from June. How quickly sentiment turns!
Source: WSJ
_____
In the United States, the Fed’s experimental programs (RRP and term deposits)
continue to drain some reserves going into the year-end (term repo now stands
at $100bn).
The crowding out effect from the Fed’s programs as well as some oversupply of
new treasury bills continues to push the 1-year bill rate higher.
_____
Just as was the case with manufacturing, US services sector growth slowed more
than expected. Q4 may be tracking to 2.5% growth – back to the “new normal”.
_____
US dealer inventories of investment grade corporate bonds have collapsed to
record low. From what I am hearing, liquidity has been terrible as well. Note,
this is a $4.7 trillion market.
Source: @Eurofaultlines
_____
Now a couple of updates on commodities.
1. Crude oil implied volatility (as shown by the OVX index) remains elevated as
traders pay outsize premium for oil puts.
2. The effects of last winter’s deep draw of US natural gas inventory have been
erased, as gas in storage is now around the level it was last year at this time.
_____
Now some food for thought- a couple of items:
1. Falling fuel costs don’t seem to be making their way into airline ticket
prices.
Source: @JonathanHouse1
2. It’s interesting to see the contrast in optimism on the euro among the
various Eurozone states – with Ireland and Greece on opposite sides.
Source: @FactTank @EurobarometerEU
_____
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