Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 25 April 2016 at 11:00 GMT

Daily Shot: Brexit risks weigh on UK capex and hiring Team / Saxo Bank
  • UK capital expenditure and hiring plans have fallen as Brexit fears have risen
  • UK sovereign credit default spreads have widened
  • Speculative short GBP positions are growing; GBP would rally if "stay" side wins
  • Speculative accounts' net long yen positions reach new highs
  • Chinese planned investment is driving bets on industrial commodities
  • USD remains driver of risk asset valuations, especially commodities and EM assets
  • US manufacturing is in worst shape since 2009, according to Markit survey

By Walter Kurtz*

We begin the week with the United Kingdom.

Brexit risk weighs on UK businesses as the referendum approaches. Surveys show declining investment and hiring plans.

UK investment and hiring are declining Source: Citi 

The UK sovereign credit default swaps spread remains elevated relative to the past couple of years.
UK CDS spread

Source: Citi

Short GBP speculative positions continue to build. We could see a sharp GBP rally if the "stay" vote prevails.

Short GBP positions


Now on to the Eurozone where we have the following developments.

Greek banks are up 37% over the past 10 days on (supposed) progress in the negotiations with the European Union and International Monetary Fund regarding the structure of the Greek bailout. There have been rumors that the IMF wants Greece to default because the bank views the debt as completely unsustainable. IMF chief Christine Lagarde denied it of course.

Greek banks Source:

This chart shows total corporate bond issuance in euro. Thank you, Mr. Draghi.

Total corporate bond issuance in euro

Source: Morgan Stanley 

The European Central Bank's accelerated quantitative easing will hit the 33% limit of government bond purchases faster (% of total issuer balances). Will the ECB raise the limit to 50%? Note that 33% is already an increase from 25% (with some restrictions).

ECB's accelerated QE will hit limit

Source: Morgan Stanley 

The Eurozone dodged a tightening in credit conditions in spite of elevated risk aversion in the first quarter. Many expected banks, whose equity and contingent convertible bonds (CoCos) got hit hard, to pull back on lending.

Bank lending survey
Source: Deutsche Bank 

French manufacturing is contracting faster than expected. The services sector is keeping the economy in growth mode for now.

French manufacturing PMI

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The next three items focus on Japan.

Speculative accounts' net long yen positions reach new highs. It's time to get cautious on this trade as we could see a sharp dollar rally in an unwind.

JPY Speculative positions

The 1-year Japanese government bond yield hits new lows just as longer-dated yields stabilise.

Japan 1YR yield Source: 

Mitsubishi Motors shares keep declining after the fuel scandal — down another 5.5% this morning.

Mitsubishi Motors share price

Source: Google 

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Now a couple of observations on China.

Here is what's been driving bets on industrial commodities lately: China's "planned investment". The nation is having a tough time breaking its addiction to investment-based growth. This is also why Moody's has turned cautious on China's sovereign debt (which is used to finance some of this investment).

Chinese planned investment
Source: Goldman Sachs 

The renminbi continues to move lower. Note that if the dollar resumes its rally, Beijing may be forced to devalue CNY against the dollar to keep this trend going.

Yuan declines
Source: Deutsche Bank

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The US dollar remains the driver of risk asset valuations, especially commodities and emerging markets. If the dollar rally resumes, global financial conditions will tighten again and these assets will come under renewed pressure.

Trade-weighted USD
Source: Citi 

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Speaking of emerging markets, here is Goldman Sachs on the latest jobs data from Brazil. Ouch.

Brazil jobs situation-Goldman
 Source: Goldman Sachs

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Next, let's cover some observations on the energy markets.

Citi researchers are bullish on crude oil.

Citi bullish on oil

Source: Citi 

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Many are projecting the oil oversupply to ease in the next year, which should support prices. Perhaps.

Liquid fuel supply balance

The US oil rig count continues to decline, almost in a linear fashion.

US rig count

This chart shows crude oil storage capacity utilisation at Cushing, Oklahoma, remaining elevated. 

Cushing, Okla, storage capacity utilisation elevated
Source: CLSA 

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Now, let's take a look at US equity and credit markets.

Energy shares have outperformed year-to-date.

US energy shares outperform in 2016 Source: 

Here are the cumulative flows into equity and credit funds. A mini "rotation"? 

Flows into US equity and bond funds

Source: BAML

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Here are a few updates on the US economy.

According to Markit Economics, US manufacturing is in the worst shape since 2009. Just take a look at the commentary. 

US Markit survey


Source: @MarkitEconomics

Things are apparently looking better going forward. The ECRI weekly index of leading indicators continues to rise.

ECRI Weekly index of leading indicators
Source: ECRI 

The futures-based probability of a US June rate hike is at 20%. As discussed last week, some believe it should be higher. 

Futures-implied probability of a June Fed rate hike
 Source: BAML

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Speculative accounts are net short the US dollar (slightly) for the first time in a couple of years. Once again, if the market perceives that the above probability is materially above 20%, a sharp dollar rally could ensue.

Speculative USD accounts
Source: Credit Suisse  

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Turning to Food for Thought:

Apparently counterfeit goods account for 2.5% of the world's imports.

Food for Thought
Source:‏ ‏‏@StatistaCharts, h/t Jake 

It all begins here. Next we'll have dog loan securitisation and an out-of-control puppy price bubble.

Food for Thought
Source:‏ @BarbarianCap, @NickatFP

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— Edited by John Acher

* Walter Kurtz is an alias

**This is an abridged version of the Daily Shot. To subscribe to the full version, link to the Daily Shot and select the appropriate command. E-mail addresses are never shared with anyone.


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