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 / 08 February 2016 at 10:30 GMT

Daily Shot: Equities under pressure, gold surges Team / Saxo Bank
  • US job creation below consensus, but seen as hawkish anyhow
  • Gold surged while equities are under pressure, but high-yield ones doing better
  • Food for Thought: chicken wing prices are sharply up
By Walter Kurtz*

We begin with Friday's US employment report. The number of jobs created in January was below consensus but the market interpreted the figures as "hawkish" (potentially providing some ammunition for the Federal Reserve to continue raising rates). Short-term rates rose in response (treasuries and rate futures fell).

Markets were especially spooked by rising wages: from 2% to 2.5% per year. It's not clear however if this qualifies as "wage pressures". 

Another trend "spooking" the markets is the convergence between the unemployment rate and NAIRU (as the headline unemployment rate falls below 5%). NAIRU is the rate of unemployment below which inflation supposedly begins to rise.

However, the NAIRU trend can be misleading because the declines in some broader measures of unemployment have stalled. Here is U-6 for example.
We also see the average duration of unemployment remaining elevated. The improvements in US labor markets therefore have been uneven. 
Other than the nasty equity market selloff, several indicators pointed to significant jitters in the market.

1. Deutsche Bank CDS continued to widen (as discussed Friday).
2. Gold prices rose sharply.
3. High-dividend shares saw a massive outperformance over the last few weeks.
high dividend
A useful chart from Morgan Stanley below shows the breakdown of equity returns by region/country and the components of performance.
Morgan Stanley
The next chart shows which sectors contributed to the volatility this year in both the S&P 500 and the Russell 2000 (small cap index). 
S&P 500 Russell separator
In the broader corporate lending market there is little evidence of deceleration of credit expansion. Corporate loan balances hit a record last week, exceeding $2 trillion for the first time.

While loan balances to smaller firms by banks are not readily available, lending by smaller banks (who presumably lend mostly to smaller firms) show a similar trend. Perhaps we are going to see this leveling off in the next few weeks. Of course we know that BDCs and middle-market CLOs (shadow banking) are out of the market, creating a real problem for the more leveraged firms. This could be a big opportunity for private credit funds who have capital.
Very leveraged firms who used to have access to the bond markets, no longer do. There is some activity for better quality names, especially in syndicated leveraged loans (second chart below). 
very leveragde firms China's foreign reserves fell nearly $100 billion last month to lowest since May 2012. The decline was largely expected as models showed significant outflows. Will this continue? The big fear out there is that Beijing may try to preserve the reserves by letting the RMB depreciate further. China's foreign reserves


Finally, we have a couple of economic updates for North America.
1. Canadian unemployment rate is moving higher. Nothing to see here, move on ...
separator 2. The Atlanta Fed GDP tracker (GDP Now) shows a surprisingly strong US GDP forecast for Q1. Given the tight financial conditions we've been seeing recently, this is likely to move lower.

Atlanta Fed
3. This next chart shows US exports and the trade-weighted USD. Exports are likely to fall even further as the recent dollar strength makes its way through the global economy. Can the US really afford an even stronger currency that could result from further rate hikes this year?
US exports / USD
Turning to Food for Thought, we have 3 items this morning:

1. According to Bloomberg, "Americans ate 1.3 billion chicken wings this weekend". The chart below shows chicken wing prices.
Chicken Wings
2. Overturned convictions across the US. What's up with Texas? 
Overturned convictions in US
3. We've shown this chart before, but given the occasion, it's worth revisiting: Most watched sports championship finals. 
most watched spots championship finals

— Edited by Clemens Bomsdorf

* 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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