The Daily Shot - 12/22/14

From: "The Daily Shot" <thedailyshotletter@xxxxxxxxx>
To: <thedailyshot@xxxxxxxxxxxxx>
Date: Tue, 23 Dec 2014 01:55:04 -0500
The Daily Shot™

 

 

Greetings, 

 

We start with China where we see no signs of PBoC easing at this point. In fact 
money market rates remain relatively elevated. The 7-day repo rate, one of the 
more liquid short-term markets, has risen above 6%. I am told this is driven by 
Beijing’s new tighter repo collateral rules, as the authorities try to reduce 
leverage in China’s high yield bond markets.

 



Source: Chinamoney

 

It’s important to note however that with China’s core CPI running at 1.3%, this 
puts real short-term rates at around positive 5% - an incredibly tight monetary 
stance by the PBoC. The Bloomberg China GDP tracker continues to show weaker 
growth, making such tight monetary policy even more surprising.

 



Source: @M_McDonough

 

That’s part of the reason we see no improvements in China’s industrial 
commodity prices, as traders remain negative on growth.

 

May 2015 China iron ore futures contract:



Source: barchart

 

In another puzzling development, Beijing is allowing the yuan to weaken again. 
It’s not clear if this is driven by Beijing’s attempt to shake out currency 
speculators or a more strategic move to decouple from the appreciating US 
dollar. Whatever the case, there will be some angry US politicians calling 
“currency manipulation” on this …

 

Chart shows USD appreciating against CNY:



  _____  

 

Global deflationary pressures remain entrenched. For example Singapore’s recent 
CPI report showed a year-over-year price decline.

 



Source: Singapore Department of Statistics

 

 

And a commonly quoted broad commodity index (GCC) has fallen to 2009 levels. 

 



Source: barchart

 

If China’s monetary policy remains tight, it’s difficult to see these pressures 
receding any time soon.

  _____  

 

While the world has focused on Russia recently, conditions also remains 
difficult in Brazil. The currency is near multi-year lows.

 



 

And the nation’s fiscal situation is deteriorating, as the government struggles 
with high cost of funds. Unfortunately Dilma Rousseff’s newly re-elected 
populist administration remains completely incapable of addressing the 
situation. 

 



Source: Natixis

  _____  

 

In the United States the treasury curve is now the flattest since the Great 
Recession. The chart below shows the spread between the 30-year bond yield and 
the 2-year note.

 



 

While long-term rates have been suppressed by low global rates and falling 
inflation expectations, the short-end is being driven higher by some 
US-specific developments. With economic activity in the US remaining relatively 
strong, markets are still expecting the first rate hike in Q3 of next year, …

 



 

… and a relatively steep trajectory of rate increases thereafter.

 



Source: @JohnKicklighter  

 

That’s why we saw a fairly steep yield increase in today’s 2-year note auction 
vs. the previous auctions in recent years.

 



 

Add to that an ample supply of treasury bills and other money market products 
from the Fed (RRP and Term Deposits), and we’ve got ourselves a flattening 
treasury yield curve.

  _____  

 

In the equity markets we see declining numbers of bearish US investors. In fact 
we are around 1987 levels. The technicals here call for caution.

 



Source: Yardeni Research

  _____  

 

Banks are becoming less relevant in providing credit globally, as lending is 
increasingly dominated by what WSJ calls “shadow banking” (organizations other 
than chartered depository institutions).

 



  _____  

 

Note that a big part of that “shadow banking” is represented by the global 
“asset management” institutions. Here is how the AUM breaks down.

 



Source: @NickatFP

  _____  

 

Now some food for thought – a couple of items:

 

1.  Hope, optimism or delusion? 16% of investors beat S&P in 2014, 91% think 
they will beat it in 2015!

 



Source: @valuewalk

 

2.  Ideological polarization in the US worsens.

 



Source: Pew Research Center

  _____  

 

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The Daily Shot - 12/22/14

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