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 / 27 January 2015 at 10:10 GMT

Daily Shot: It's all about expectations Team / Saxo Bank
  • Ruble down, capital escaping Russia
  • European inflation expectations up
  • Iron still under pressure

By Walter Kurtz

Let's start with Russia where the ruble came under pressure again as Standard & Poor's downgraded the sovereign credit to junk (BB+). The currency shed about 6% against the dollar as a result. The Russians continue to convert deposits into hard currency in spite of high premiums charged by the nation's banks for such transactions. Capital flight accelerated last year.



Credit conditions remain incredibly tight (2-year government bond yield is 16%) and a waive of bankruptcies and government bailouts is about to hit banks as well as non-financial firms. 

The markets shrugged off the Greek election results as the euro bounced from the lows - which suggests that Grexit risks may be lower than some had originally thought. There is no question that there is a fight coming up between the troika institutions and the newly elected Greek government but the fallout of Grexit will be so dire for both sides that the "nuclear" option is likely off the table


Deflationary risks continue to haunt the Eurozone as Spanish producer price index (PPI) fell 3.7% year-on-year - far worse than consensus.


Nevertheless the latest quantitative easing announcement and the euro's sharp decline has lifted near term forward inflation expectations. The massive QE announcement has given the European Central Bank credibility and the markets are taking this fight against deflation quite seriously.


The QE program is unlikely to materially improve credit growth due to regulatory pressures on the banking system as well as soft demand. However it has boosted confidence, particularly in the export sector. Weak euro is especially helpful.


That's why we see the German Ifo Business Climate Index stabilizing. As a contrarian, I remain relatively constructive on the Eurozone recovery in the middle of all the doom and gloom. 

As an aside, the ECB and the Bank of Japan will now carry the torch for the Fed in global central bank balance sheet expansion.


Now a couple of notes on Latin America:
1. Brazil's FGV consumer confidence indicator hit the lowest level on record. Congratulations to Dilma Rousseff's newly reelected administration.


2. Reuters published an article on Venezuela where a new profession is taking hold - standing in line and selling your spot to those who don't want to spend all day waiting. A similar trend exists in the US on Black Friday, but Venezuela's rising shortages are making this a full-time occupation for many. Boring, but lucrative. Below is a photo of an incredibly long line for groceries, a daily occurrence.

 Source: Reuters, @sobata416 

Canada remains vulnerable to further economic deterioration. While the Fed and the Bank of Canada policy rates have generally moved in lockstep in the past, they have now diverged. In recent years Canada's energy/commodity boom (which had helped housing and the banking system) kept the Bank of Canada from moving rates to zero. Now it seems that the two nations' policies are about to diverge again. 


The data below showing the cost of Canadian oil sands production has to be making the Bank of Canada uneasy - with West Texas intermediate (WTI) crude futures below $46/bbl (and Western Canadian Select crude some $14 below that). 


In the United States we are seeing early signs of energy-driven slowdown, as the Dallas Fed's Texas production indicator declines. I'll be watching this index closely in the next few months.


US inventory of homes for sale remains low relative to the past decade - and has declined recently. Even with slow household formation and population growth, the US will need a much larger inventory over the next decade. It's not clear who will finance it however. 


The so-called term premium for treasuries is at the lowest level since 1961. Term premium is what investors demand to hold longer term bonds over bills (taking duration risk). Nordea points out that fixed income markets remain vulnerable to another "taper tantrum".  


On the other hand, the chart below shows the yield and size of various global fixed income markets (sorry about the small print). US markets look quite attractive on a relative basis. 


Global commodities remain under pressure. Iron ore prices at China's ports are taking another leg down as market fundamentals deteriorate. The chart below shows April iron ore futures.


And the Jefferies Commodity Research Bureau (CRB) Index (one of the oldest high-frequency commodities indices) has declined sharply since November. This index has somewhat higher weightings in soft commodities (grains, etc.).


Now some food for thought. 
1. Obesity continues to rise in the United States. This may become an epidemic (some say it already is) and will put a heavy toll on the healthcare system raising costs of the entitlement programs.


2. Here is the percentage of un-vaccinated kids in California (the "personal belief" exemptions) as more measles cases pop up in LA.


-- Edited by Clemens Bomsdorf
* Walter Kurtz is an alias
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