The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

By Anonymous

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Twitter: @SoberLook




The Daily Shot: 13-Aug-18
• Emerging Markets
• China
• New Zealand
• The United Kingdom
• The Eurozone
• Canada
• The United States
• Equity Markets
• Credit
• Commodities
• Energy
• Rates
• Cryptocurrencies
• Global Developments
• Food for Thought

Emerging Markets

1. In a move reminiscent of the Asian financial crisis (two decades ago), the Turkish currency's freefall sent jitters across the globe. "Contagion" was the word of the day on Friday.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Amid escalating tensions with the US, the lira broke through 7 (to the dollar) on Sunday afternoon before recovering some ground.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Supposedly, Turkey has an "action plan" to address the crisis.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: Reuters; Read full article

Is the plan going to involve more US dollar burning?

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @hxhassan, @MattGarrett3

The three-year domestic Turkish bond yield broke through 24%, and the credit default swap spread exceeded that of Greece (2nd chart below).

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot
The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @TheTerminal; Further reading

Here is the iShares Turkey stock market ETF which saw record trading volumes on Friday.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot
The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: BlackRock

And this is the stock market capitalization.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: Bloomberg, @Schuldensuehner

As discussed previously, the greatest concern around Turkey remains its liability structure, with massive amounts of dollar- and euro-denominated debt.

- Bank loans:

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: WSJ.com, h/t Paul Menestrier; Read full article

- Foreign borrowings by Turkish banks (see the Eurozone section for most exposed banks):

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @M_PaulMcNamara, h/t @MattGarrett3

At the same time, foreign reserves remain relatively low.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: IMF, @MattGarrett3; Further reading

Here is Turkey's debt maturity profile (blue= principal, yellow = interest).

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @M_McDonough

2. Turkey's troubles reverberated across EM, with currencies tumbling in most countries.

The JP Morgan EM Currency Index:

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Bloomberg's EM carry index:

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

The South African rand:

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

The Russian ruble:

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

The Argentine peso (record low):

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

3. EM credit markets came under pressure as well.

Dollar-denominated and local-currency bonds (in dollar terms):

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Here is Argentina's 10yr bond (price).

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Dollar-denominated EM bond spreads:

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Argentina's and Russia's credit default swap spreads:

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot
The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

3. In other developments, India's industrial production surprised to the upside.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

4. Mexico's industrial production disappointed.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Mexican wage growth remains robust.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

5. Brazil's retail sales growth continues to slow.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot


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China

1. Monthly car sales point to some unease among China's households.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: WSJ.com, h/t Paul Menestrier; Read full article

2. Mainland Chinese investors have been dumping Hong Kong stocks.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @acemaxx, @business; Read full article

3. The Hong Kong dollar is trading right at the 7.85 boundary. Will we see further interventions from the HKMA to shore up the currency?

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot


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New Zealand

The kiwi dollar and the nation's bond yields keep falling in response to the RBNZ's dovish stance.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot
The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot


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The United Kingdom

1. The UK's GDP report was in line with expectations. Consumption was weaker than the forecasts, while investment (third chart below) was stronger.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Economic growth in June was particularly soft.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: Pantheon Macroeconomics

2. The UK's exports slumped in the second quarter.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

In this cycle, the pound's weakness has not helped net trade.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @samueltombs

3. Industrial production was better than expected (3 charts below).

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

4. The pound continues to weaken.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

And speculative accounts are boosting their bets against the UK's currency.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

5. Next, we have some poll results.

Control over immigration vs. free trade with the EU:

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @britainelects, @ORB_Int; Read full article

Confidence in Theresa May's ability to get the "right" deal with the EU:

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @britainelects, @ORB_Int; Read full article

Parliamentary seats representing (net) pro-Remain constituencies are now a majority.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: The Guardian; Read full article


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The Eurozone

1. Spanish, French and Italian banks have the highest exposure to Turkey.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: Capital Economics

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @financialtimes; Read full article

With the Turkish contagion concerns spreading to Europe, bank shares tumbled on Friday.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Here is the euro.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

2. Italian bond spreads to Germany are climbing again.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Italy's 12-month government bill auction cleared at the highest yield since 2014.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot


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Canada

1. The employment report was stronger than expected. However, the increase in payrolls was driven by part-time workers.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

The unemployment rate is back to multi-year lows.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Despite tighter labor markets, Canada's wage growth unexpectedly slowed.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

2. This pie chart shows the components of Canadian exports to the US.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: Moody's Investors Service


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The United States

1. Let's begin with the CPI report which was stronger than expected. The core CPI hit the highest level in a decade.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot
The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

The median CPI climbed further.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Despite higher inflation, Treasury yields declined as a result of the Turkey contagion concerns (see the emerging markets section).

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

And the market-based probability of two additional Fed rate hikes this year decreased.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Here are some highlights from the CPI report.

This is the core CPI decomposition.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: Nomura Securities

The next chart shows the 'sticky' vs. 'flexible' components of the core CPI (see definitions).

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Vehicle prices are no longer a drag on the CPI.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Airfare CPI increased but continues to lag airline fuel costs.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: Pantheon Macroeconomics

As we saw in the PPI report, healthcare CPI fell, with medication costs leading the way (second and third chart below).

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot
The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: Nomura Securities

Education CPI is no longer declining.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

A stronger dollar helped push the apparel CPI lower (most US apparel is imported).

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Most forecasts point to further increases in the core CPI (to about half a percent above the Fed's target).

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: Nomura Securities

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: Pantheon Macroeconomics

2. Inflation-adjusted wages in the US are now below last year's levels.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

3. The dollar continues to climb, and hedge funds are betting that the US currency will rise further (second chart). A stronger dollar is likely to be a drag on the GDP.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot
The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: ANZ Research

4. Economists expect the GDP growth to dip back below 2% in the next couple of years.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: WSJ.com, h/t Paul Menestrier; Read full article

For example, here is a forecast from Pantheon Macroeconomics.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: Pantheon Macroeconomics

5. With banks easing their lending standards for businesses, will we see improved CapEx growth going forward?

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: Capital Economics

6. Factories are facing shortages of parts due to slower supplier deliveries.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: WSJ.com, h/t Paul Menestrier; Read full article

7. Small businesses continue to struggle filling job openings. Will this trend lead to improvements in labor force participation?

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: Pantheon Macroeconomics

8. Which factors drove the government's latest revision of personal income?

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: Oxford Economics


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Equity Markets

1. Once again, investors were surprised that troubles in an economy such as Turkey could end up pressuring markets in the US (see the emerging markets section). The widening market gap between the US and the rest of the world is not sustainable.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

2. Semiconductor stocks took a hit as Microchip's forecasts disappointed.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot
The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

3. Small caps outperformed last week.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

4. Below we have the stats for earnings and revenue surprises in this earnings season.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @FactSet; Read full article

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @FactSet; Read full article

5. Based on Merrill Lynch's client data, investor equity allocations remain aggressive.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: BofA Merrill Lynch Global Research

The top 10 positions have a high beta to the S&P 500.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: BofA Merrill Lynch Global Research

6. Finally, this chart shows the non-commercial accounts' VIX futures net positions. Will we see the vol-shorting trend reversing this week?

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot


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Credit

1. Interest coverage for US small caps continues to drift lower. This trend is not going to end well when the economy slows.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: BofA Merrill Lynch Global Research

2. Small companies are also more exposed to rising rates due to a higher percentage of floating-rate liabilities.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: BofA Merrill Lynch Global Research

3. The covenant-lite percentage of US leveraged loans continues climb.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @lcdnews; Read full article

4. Will EM high-yield bonds drag their US peers lower?

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

The US HY market appears to be overbought.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: SPDR Americas Research; Read full article

5. BDC IPOs and follow-ons have slowed sharply.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @theleadleft, @TRLPC; Read full article


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Commodities

1. Soybean glut in the US worsened as stockpiles hit records. Soybean and soy meal futures tumbled.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @JavierBlas

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot
The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

2. Speculative accounts keep reducing their exposure to gold.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

3. US cannabis prices continue to drift lower.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @bySamRo; Read full article


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Energy

1. Russia's oil production jumped in July.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: WSJ.com, h/t Paul Menestrier; Read full article

2. Iran will be forced to sell crude oil at a discount.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @JavierBlas, @TheTerminal, @helloimserene


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Rates

1. The Treasury curve has been flattening out to 10 years but has steepened at the long end.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

2. This chart shows speculative accounts' rising bets against the 5yr Treasuries.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot


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Cryptocurrencies

Bitcoin continues to sharply outperform other cryptos (DigiCorEW = equally-weighted crypto index).

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: DigiCor


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Global Developments

1. Traders bid up the Swiss franc amid the Turkey-Eurozone contagion concerns.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

2. Which nations are exposed to trade with Turkey?

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: Capital Economics

3. Below is the G-20 labor share of the GDP.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: Bloomberg; Read full article

4. This chart provides the year-over-year economic growth for nations that have reported their second-quarter GDP.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @Rupert_Seggins

5. Finally, here is a chart showing global property prices by sector.

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: Capital Economics


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Food for Thought

1. The number of languages spoken in the largest US cities:

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @Davos; Read full article

2. Trouble signing up for the ACA health coverage:

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @KaiserFamFound; Read full article

3. Fundraising in toss-up House races:

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @axios; Read full article

4. Europe's geopolitical alignments:

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: Fitch Solutions

5. Some of the largest producers of milk:

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: WSJ.com, h/t Paul Menestrier; Read full article

6. Miss America pageant viewership:

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: WSJ.com, h/t Paul Menestrier; Read full article

7. How would you spend your time in a self-driving car?

The Daily Shot: Global Markets Gripped by Contagion Fears - Daily Shot

Source: @wef; Read full article

The Daily Shot provides objective and disinterested analysis and commentary regarding macroeconomic and market trends. Other than indirectly through country or sector specific exchange-traded or mutual funds, the author of the Daily Shot does not have any interest in or own any of the individual securities which may be mentioned. The Daily Shot does not provide investment advice or any recommendations regarding particular securities. Nothing in the Daily Shot should be relied upon in making an investment decision, nor considered to be a solicitation to offer or buy any securities.

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