The Daily Shot - 12/3/14
- From: "The Daily Shot" <thedailyshotletter@xxxxxxxxx>
- To: <thedailyshot@xxxxxxxxxxxxx>
- Date: Thu, 4 Dec 2014 01:29:26 -0500
The Daily Shot™
Greetings,
Tonight let’s start with the euro area where, according to the latest Reuters
poll, we have even odds that the ECB will end up undertaking a quantitative
easing program.
Source: Reuters
The sudden and unexpected move by the Bank of Japan recently to accelerate its
securities buying program has further strengthened the euro against the yen,
putting pressure on the ECB to "retaliate" in the currency war with the BoJ.
The ECB isn’t “officially” targeting the euro of course, but there is pressure
to act nevertheless.
Source: Investing.com
It’s important to note that at this point such easing by the ECB is at least
partially priced into the markets. If the central bank doesn’t go through with
it, we are going to see a sharp EUR rally, as the massive speculative short
positions unwind. Other markets will be impacted as well - in particular
periphery sovereign bonds will sell off. And volatility will spike across the
board.
_____
There is more trouble in Russia, as the 10-year government bond yield breaches
11%.
Russian sovereign CDS is widening sharply as well – particularly in reaction to
the weakness in the banking system. The chart below shows the implied
probability of default based on a 40% recovery.
Source: Deutsche Bank
_____
Brazil continues to struggle economically as Dilma Rousseff’s Workers' Party is
about to deliver another 4 years of the same Socialist policies. The
China-powered commodity export gravy train has stopped.
_____
In the United States better economic indicators continue to point to strong
growth. The ISM service sector PMI came in much better than expected (PMI > 50
= expansion). This seems to be supported by today's upbeat Beige Book report
from the Fed - improvements across the board except in wages and inflation.
Source: Investing.com
In fact some argue that the composite of services and manufacturing ISM PMI
measures tracks to near-5% GDP growth in Q4. Hard to imagine but …
Source: @osullivanEcon
_____
In addition to cheaper fuel prices, low rates also provide some tail winds for
US households. Yesterday I discussed cheap and flexible auto loans driving auto
sales to new highs. We also see some support from lower mortgage rates.
As a result (at least so far), holiday spending in the US seems to be outpacing
what we saw in 2013 this time of the year.
_____
US infrastructure and equipment seems to be getting old and at some point will
need to be replaced. That will hopefully compensate for the expected weakness
in the energy sector expenditures going forward.
Source: @themoneygame
_____
Improving economic indicators in the US are driving the dollar higher – to
levels we haven’t seen since 2006 (measured by the DXY index).
Source: barchart
Stronger dollar, the energy situation, weaker growth in China, and record grain
crops have all pushed some broad commodities indices to new multi-year lows.
_____
There is a great deal of noise out there about the “glut” of oil in the US.
However at this point US liquid fuel supplies are below last year’s levels. So
for all of you reporters out there – get the facts before making generalized
statements.
Source: EIA
_____
Pain in energy-related credit is worsening as oil & gas bank loans take a
beating.
However LCD/S&P points out that “the sector’s damage to the broader market has
been limited when compared to high-yield and equities. The reason is that oil
and gas-related issuers make up 4.5% of the S&P/LSTA Index, excluding
utilities. That compares to 16% for the Bank of America Merrill Lynch High
Yield Index and 8.5% for the S&P 500”. That’s why HY and leveraged loan indices
have diverged so much (as I discussed a couple days ago).
_____
Credit Suisse shows the divergence in performance across what they define as
“alternative investments” (outside of stocks and bonds). These include
commodities, real estate, and hedge funds. They believe we are going to see
further divergence next year.
Source: Credit Suisse
_____
Now some food for thought – a couple of items on the menu tonight:
1. What keeps people from buying a home in the US?
Source: @georgepearkes, @M_C_Klein
2. US divorce rates have peaked in the 80s and have been declining over the
past 20 years.
Source: @conradhackett, <https://twitter.com/JustinWolfers> @justinwolfers, NY
Times
_____
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