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TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO

Takeaway: Short-term bounces notwithstanding, China's slowing growth continues to weigh on the global outlook.

Key Takeaway:

The roller coaster ride continues with high yield (-22 bps) and commodities (+6.2%) looking better on the week, while China, the TED Spread and EM sovereign swaps looked worse. 

 

China, of course, remains a front burner focus, but the TED Spread has been quietly creeping higher over the past month and is now +6 bps M/M to 31 bps as well.

 

Concerns over the global fallout  from a slowing China continue to reverberate. CDS for Chinese financial institutions widened between +16 and +21 bps last week, and the Chinese interbank rate widened by +26 bps to 2.03%. 

 

Reflecting the market's growing worries about China, our heatmap below is dominated by red on both the short and intermediate term.

Current Ideas:


TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO - RM19 CURRENT IDEAS 2

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 1 of 12 improved / 5 out of 12 worsened / 6 of 12 unchanged
• Intermediate-term(WoW): Negative / 0 of 12 improved / 7 out of 12 worsened / 5 of 12 unchanged
• Long-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged

TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO - RM15

 

1. U.S. Financial CDS – Swaps tightened for 12 out of 27 domestic financial institutions while unchanged at the median. Even with stocks losing value last week, overall perceived risk of default in the U.S. was little changed.

Tightened the most WoW: MBI, AGO, ACE
Widened the most WoW: LNC, PRU, MET
Tightened the most WoW: ACE, ALL, CB
Widened the most MoM: MET, MMC, RDN

TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO - RM1

 

2. European Financial CDS – Swaps mostly widened in Europe last week, strongly affected by weak Chinese manufacturing data, even after ECB President Mario Draghi said he could provide further stimulus to the Eurozone given his projections for slower than expected growth and low inflation.

TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO - RM2

 

3. Asian Financial CDS – Chinese financial CDS widened notably last week, between +15 and +21 bps, as the country was hit with weak manufacturing data early in the week. Meanwhile, Japanese and Indian financial CDS were little changed.

TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO - RM17

 

4. Sovereign CDS – Sovereign Swaps were little changed last week. French sovereign swaps tightened by -1 bps to 33 bps while Italian sovereign swaps widened by +1 bps to 116.

TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO - RM18

 

TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO - RM3

 

TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps widened last week on concerns that their export-based economies would be hurt by slowing Chinese growth. Brazilian sovereign swaps widened the most, by +48 bps to 379, followed by Turkish swaps, which widened by +17 bps to 280.

TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO - RM16

TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO - RM20

6. High Yield (YTM) Monitor – High Yield rates fell 22 bps last week, ending the week at 7.15% versus 7.37% the prior week.

TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO - RM5

7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.0 points last week, ending at 1865.


TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO - RM6


8. TED Spread Monitor – The TED spread rose 3 basis points last week, ending the week at 31 bps this week versus last week’s print of 27 bps.


TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO - RM7


9. CRB Commodity Price Index – The CRB index rose 6.2%, ending the week at 197 versus 185 the prior week. As compared with the prior month, commodity prices have decreased -0.8%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.


TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO - RM8


10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 10 bps.


TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO - RM9


11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 26 basis points last week, ending the week at 2.03% versus last week’s print of 1.77%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.


TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO - RM10


12. Chinese Steel – Steel prices in China fell 0.6% last week, or 13 yuan/ton, to 2260 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.


TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO - RM12


13. 2-10 Spread – Last week the 2-10 spread tightened to 142 bps, -5 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.


TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO - RM13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 5.9% upside to TRADE resistance and 2.5% downside to TRADE support.


TUESDAY MORNING RISK MONITOR | CHINA REMAINS RISK NUMERO UNO - RM14


Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

 

 


VIX, FX and Rates

Client Talking Points

VIX

Does an explicitly more dovish Fed tone down short-term volatility here? Our risk range model actually implies it could as the top-end of our range on front-month VIX no longer has a 4-handle in front of it (range still elevated, but 22-36).

FOREIGN CURRENCY

Down Dollar = Up Yen = Nikkei Down (another -2.4% overnight), so not everyone is a winner. Risk ranges are narrowing though as volatility across asset classes does this morning (risk range for EUR/USD narrows to $1.10-1.14).

RATES

UST 10YR dropped to 2.11% on the slowest rate of change in Non-Farm Payrolls since the Labor Cycle gains peaked in FEB, then back up this morning to 2.15% with Spanish 10YR +7 basis points approaching parity with UST at 2.14%.

 

**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 68% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 4%
FIXED INCOME 28% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

The franchisees voted YES on the proposal to launch All Day Breakfast nationwide at all 14,318 U.S. locations. This is a very important, monumental move by CEO Steve Easterbrook. It will define his legacy as the CEO that changed McDonald's (and the rest of the industry) for many years to come. In 2016, if MCD (with all day breakfast and an improved value message) can drive same-store sales up by 5%, the system will generate $1.9bn in incremental system-wide sales. 

 

As noted in our survey we released on July 27th, it is evident that All Day Breakfast (ADB) will be a game changer for the company. Breakfast is the single most requested item by McDonald’s customers. Listening to the customer is a tried and true way to succeed.

PENN

Following our recent visit to Plainridge and meetings with senior management, we reiterate our positive Penn National Gaming thesis.  Stability in regional markets provides good earnings visibility while expected strong contributions from Plainridge and Jamul next year should provide a nice 2 year growth story.

 

Regional gaming likely cooled off in August following a strong July.  While that could provide some consternation as the states begin releasing August gaming revenues later this week, the YoY slowdown is more related to quantitative factors rather than the health of the regional gaming customer.  September should quickly provide evidence of that.

TLT

The labor market peaks late cycle and the trend in key employment data suggest things are going from great to good (marginal changes matter). The ADP employment report showed a sequential acceleration, printing +190K vs. +185K in July. But to be clear, this series peaked at over +200K additions in the first couple of months of 2015. Initial jobless claims bottomed about six weeks ago. The trend in that series is moving back to the all-important 300K level. While the headline NFP number was a bomb on Friday, printing +173K for Aug. vs. estimates for +215K, the trend is also turning. This series also peaked back in February on a YoY rate-of-change basis.

 

Why do we point to all of this growth-slowing data? Because it’s meaningful.

  • As we have mentioned repeatedly Central Banks take a reactionary policy response to the data. The market is becoming more efficient at getting in front of policy the longer we venture into this modern-day central policy experiment
  • When forward-looking growth expectations are taken down, the back end of the Treasury curve flattens (this is good for TLT and EDV)
  • In reaction to more dovish policy monetary policy measures, the market likes gold over dollars coming out of central policy events

Three for the Road

TWEET OF THE DAY

I don't chase - our call was to cover the Transports $IYT and some shorts on Friday's red 

@KeithMcCullough 

QUOTE OF THE DAY

The essential part of creativity is not being afraid to fail.

Edwin H. Land

 

STAT OF THE DAY

On average, deciding to fly Spirit added 11 minutes to a person’s total flight time between July 2014 and June 2015.


September 8, 2015

September 8, 2015 - Slide1

 

BULLISH TRENDS

September 8, 2015 - Slide2

September 8, 2015 - Slide3

September 8, 2015 - Slide4

 

BEARISH TRENDS

September 8, 2015 - Slide5

September 8, 2015 - Slide6 

September 8, 2015 - Slide7

September 8, 2015 - Slide8

September 8, 2015 - Slide9


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The Macro Show Replay | September 8, 2015

 


CHART OF THE DAY: The Latest of #LateCycle U.S. Economic Indicators

Editor's Note: The following chart and excerpt are from this morning's Early Look written by Hedgeye CEO Keith McCullough. If you're looking for a dynamic way to to get ahead of anemic consensus groupthink each morning click here to learn more.

*  *  *

CHART OF THE DAY: The Latest of #LateCycle U.S. Economic Indicators  - z la lal la 09.08.15 chart

 

...While we won’t be sure until we move out further in time, with every US Jobs Report we’re becoming more sure that the peak in the latest of #LateCycle US economic indicators peaked when the cycle did.

 

As you can see in today’s Chart of The Day (with my doodles):

 

    1. The peak (year-over-year rate of change) in both non-farm and private payroll growth was in FEB 2015
    2. Non-farm (NFP) payrolls have slowed from 2.34% in FEB to a YTD low of 2.09% in AUG
    3. Private payroll growth has slowed from 2.71% in FEB to 2.37% in AUG

Intuition vs. Insight

“Insight is the discovery of new patterns.”

-Gary Klein

 

Whereas “intuition is the use of patterns they’ve already learned.” That’s how Dr. Gary Klein differentiates intuition vs. insight in a fantastic new book I cracked open this weekend called Seeing What Others Don’t The Remarkable Ways We Gain Insight

 

In that excerpt in particular, Klein was analyzing the decision making #process of firefighters who “build up patterns that apply in making rapid decisions in emergencies.”

 

“Firefighters often changed their beliefs about a complex fire as they learned more details… surprises forced them to rethink what was going on and replace erroneous beliefs.” (pg 27) Is that how you risk manage non-linear market and economic risks? I do.

 

Intuition vs. Insight - z fire fire

 

Back to the Global Macro Grind

 

Maybe I learned about macro risk management from my Dad (firefighter for 38 years) – maybe I just had enough humility to learn it from Mr. Macro Market himself. Like in most things macro, I should never be sure.

 

While we won’t be sure until we move out further in time, with every US Jobs Report we’re becoming more sure that the peak in the latest of #LateCycle US economic indicators peaked when the cycle did.

 

As you can see in today’s Chart of The Day (with my doodles):

 

  1. The peak (year-over-year rate of change) in both non-farm and private payroll growth was in FEB 2015
  2. Non-farm (NFP) payrolls have slowed from 2.34% in FEB to a YTD low of 2.09% in AUG
  3. Private payroll growth has slowed from 2.71% in FEB to 2.37% in AUG

 

But, but – there are no buts. Until enough people believe that “it’s different this time,” the recent #history of the US Labor Cycle slowing is what it is. Alongside slowing Growth, Inflation, and Revenues/Earnings – it’s all part of the #LateCycle slowing, ex-“China.”

 

The good news about this is that some of it is being priced in. On Friday’s print, US stocks (SP500) dropped -1.5% and the UST 10yr Yield fell to 2.11%. Despite both “bouncing” (again) this morning, that is what it is now too.

 

On the pricing in of it all, here are some things to consider when contextualizing your next series of decisions:

 

  1. SP500 was down -3.4% last week, taking its 1-month drop to -8.2% and draw-down from the all-time high to -9.8%
  2. The US Dollar (Index) was up then down to end last week and has lost -1.7% of its value in the last month
  3. At 2.12%, the 10yr UST yield dropped 6 basis points (bps) last wk and is down -10 basis points in the last month
  4. Utilities (XLU) and Healthcare (XLV) stocks dropped, despite rates falling, -5.1% and -4.3% last wk, respectively
  5. US 5yr Break-Evens (inflation expectations) fell another -10bps last wk (-17bps in the last month) to 1.16%

 

In other words, that’s what it means when both GROWTH and INFLATION are starting to (not finished) price in the slowing. In classic #LateCycle form, as the data slows, the US Dollar’s gains have alongside falling interest rates.

 

Futures and Options positioning is becoming quite bearish on growth and inflation too. Here’s the update on CFTC non-commercial net LONG and SHORT positions:

 

  1. SP500 (Index + Emini) net SHORT contracts ramped -113,152 last wk (most bearish move all year) to -153,997
  2. EURO net SHORT position is at one of its least bearish positions in a year at -59,691 contracts
  3. YEN net SHORT position fell to its lowest of 2015 at -20,994 contracts

 

What you can see here is a relatively new pattern of big macro players putting on a collectively bearish bet on both US growth and the currency appreciation expectations that used to be built into a June “rate hike.”

 

Now that June has come and gone, the doves are starting to cry at the Federal Reserve about September. This morning’s @WSJ update has a Fed voting member who was relatively hawkish (San Francisco Fed Head, Williams) going dovish too.

 

From NY Fed Head, Bill Dudley, to the West Coast’s Williams what you can also see here is a new pattern of the Fed becoming concerned about a “falling stock market” (Williams’ words, not mine).

 

If the Fed just says “NO SEP HIKE”, will that clarity perpetuate less short-term volatility in both FICC (Fixed Income, Currencies, and Commodities) and Global Equities? I think it might.

 

And the only reason why I think that is because my front-runner (my risk range process) is finally signaling tighter ranges in not only rates this morning, but the EUR/USD pair and, to a relative degree, the SP500.

 

Is that a signal or noise? Intuition or insight? I’m not sure. I rarely get more sure until the market opens and I can risk manage the fire, in real-time.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.07-2.19%

SPX 1
VIX 22.07-36.13
EUR/USD 1.10-1.14

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Intuition vs. Insight - z la lal la 09.08.15 chart


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