28 October 2014 at 9:23 GMT
- Japan retail sales surprise to the upside
- Brazilian markets, BRL tumble on Rousseff victory
- Eurozone deleveraging beginning to slow
By Walter Kurtz
Once again I’d like to start with Japan, where retail sales surprised to the upside today. This improvement in demand is the first concrete evidence that the consumption tax hike effects may be abating. The Nikkei, however, is down on the news — the Bank of Japan is now highly unlikely to accelerate quantitative easing in the near-term.
Now on to the Eurozone, where economic data remains mixed.
1. German business survey (Ifo) shows no signs of stabilisation as the sentiment continues to deteriorate. Some of this can be attributed to the ongoing weakness in exports.
2. There has been a great deal of noise around the European Central Bank’s stress testing of banks. While those results are important, there were no big surprises. Don’t fall for the media hysteria around the ECB “failing” all these banks — as far as the markets are concerned, this is a non-event. The important point about the euro area banking system is that the deleveraging process has been slowing for some time now (and may be reversing soon). Here is the evidence:
The declines in euro area loan balances are moderating.
And the growth in broad money supply is improving faster than expected.
Moscow has been trying to keep government yields below 10% — a point at which the mass media begins to pay attention. Both the five-year and the 10-year yields closed at exactly 9.99%. This is what I call “desperation”.
Today, Goldman lowered its 2015 Brent/WTI crude oil price forecast to $84/$74 from $100/$90. At these levels, we will certainly see prints above 10% for Russia’s government paper.
An ugly situation continued to develop in Brazil’s markets this morning, with the real shedding over 2% and the stock market dropping almost 5% on Dilma Rousseff's victory. The people chose four more years of economic stagnation and status quo.
Furthermore, there is talk that Brazil may lose its investment-grade rating. The market may be already pricing that in, with Brazil’s 10-year government bond yielding 12.5%.
The US economy may be losing some momentum. The most significant sign is today’s worse-than-expected services Purchasing Managers Index data from Markit (we also saw this in the Economic Cycle Research Institute leading index last week). The same trend was visible with the manufacturing PMI print earlier, as Markit commented that US “output and new order growth both eased markedly in October”. The PMI measures will be critical to watch for signs of further deterioration.
With all the global economic headwinds, the market is pricing the Federal Reserve to be on hold for most of 2015. Here is how the futures market compares to all the Federal Open Market Committee members — extraordinarily dovish.
With such dovish expectations around the FOMC rate trajectory, the markets are pricing in the “Yellen put”. The thought here is that the Fed will react to any major market volatility by further extending the timing of liftoff. If you have the Yellen put for free, why pay for stock put options? Option skew has declined materially.
It’s interesting that while we see a decline in skew (above), the number of investors expecting a major correction has risen materially (although this data is a week old). The contrarian in me says this is a positive for US equity markets.
On the commodities front, I’ve been hearing about strange developments in the copper markets. The LME copper inventories have been falling and so has the price. Furthermore, a London-based hedge fund called Red Kite Group seems to hold more than half of the current inventory.
Moreover, speculative accounts seem to be quite short copper futures on a net basis. This smells like a short squeeze in the making.
Now some food for thought from Barbarian Capital. What doesn’t kill us… makes us stronger?
-- Edited by Michael McKenna
* Walter Kurtz is an alias
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