Article / 28 October 2014 at 9:23 GMT

Daily Shot: Is Dilma Rousseff for real? Team / Saxo Bank
  • 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.

Japan retail sales

 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.

Private loans
And the growth in broad money supply is improving faster than expected.

Money supply

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”.
Russia 5-year
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%.
Brazil outlook

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.

Services PMI

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.
S&P 1M Skew

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.
Short squeeze


Now some food for thought from Barbarian Capital. What doesn’t kill us… makes us stronger?
Source: @BarbarianCap   

-- Edited by Michael McKenna

* Walter Kurtz is an alias

** Thanks for reading the Daily Shot. To subscribe or unsubscribe, link to the Daily Shot and select the appropriate command. E-mail addresses are NEVER shared with anyone.


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail