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TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL

Takeaway: Slowing growth and falling oil prices continued to erode investor confidence last week. Our heatmap is negative across all durations.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM11

 

Key Takeaway:
Slowing growth, both domestically and in China, cascading oil prices and rising concerns over default in the energy arena continue to sound the alarm for investors. Default swaps widened globally last week, especially in emerging markets and most notably in Russia where Sberbank swaps widened by +50 bps to 413 bps and Russian sovereign CDS widened by +50 bps to 385 bps as oil prices continued their slump. Additionally, the high yield YTM blew out by +53 bps last week to 8.97%.

Our heatmap below is more negative than positive across all durations.

 

Current Ideas:

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 2 of 12 improved / 6 out of 12 worsened / 4 of 12 unchanged
• Intermediate-term(WoW): Negative / 3 of 12 improved / 7 out of 12 worsened / 2 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 4 out of 12 worsened / 7 of 12 unchanged

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM15

 

1. U.S. Financial CDS – Swaps widened for 12 out of 27 domestic financial institutions with the median spread expanding by another 6 bps week over week. At the bottom of our U.S. CDS table below, we have added indices on investment grade and high yield CDS, which widened last week by 11 bps to 110 and by 33 bps to 555, respectively.

Tightened the most WoW: CB, ACE, MMC
Widened the most WoW: AIG, AXP, MET
Widened the least/ tightened the most WoW: CB, MMC, ACE
Widened the most MoM: AXP, ALL, MET

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM1

 

2. European Financial CDS – Swaps mostly widened among European banks last week. CDS on Portugal's Banco Espirito Santo were an exception, tightening by -490 bps to 1,229 on deliberations at ISDA'S Credit Determinations Committee. Last week, the committee failed to reach a super-majority decision on whether the transfer of Novo Banco senior bonds into Banco Espirito Santo constituted a governmental intervention. Additionally, it has set January 22 as its decision deadline on whether a portion of Novo Banco CDS would be transferred to Banco Espirito Santo.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM2

 

3. Asian Financial CDS – Swaps among Asian financials mostly widened last week. Chinese bank CDS widened between +8 and +12 bps as investors continued to worry about the country's decelerating economy. In India, although IDB Bank of India CDS tightened by -12 bps to 228, ICICI Bank and State Bank of India widened by 4 bps to 184 and by 10 bps to 171, respectively.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM17

 

4. Sovereign CDS – Sovereign swaps mostly widened over last week as growth concerns mounted. Portuguese sovereign swaps widened the most, rising by +12 bps to 194.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM18

 

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM3

 

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps were hit especially hard by concerns over slowing growth in China and low oil prices. Russian sovereign swaps widened by +50 bps to 385 bps. Meanwhile, Brazilian sovereign CDS are once again knocking on the door of 500 (496 bps), +9 bps on the week.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM16

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 53 bps last week, ending the week at 8.97% versus 8.45% the prior week.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 6.0 points last week, ending at 1802.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM6

8. TED Spread Monitor  – The TED spread fell 3 basis points last week, ending the week at 39 bps this week versus last week’s print of 42 bps.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM7

9. CRB Commodity Price Index – The CRB index fell -5.6%, ending the week at 160 versus 169 the prior week. As compared with the prior month, commodity prices have decreased -7.1%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - 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 12 bps.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index was unchanged, ending the week at 1.96%. 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 | SLOWING GROWTH & FALLING OIL - RM10

12. Chinese Steel – Steel prices in China fell 1.6% last week, or 33 yuan/ton, to 2009 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 | SLOWING GROWTH & FALLING OIL - RM12

13. 2-10 Spread – Last week the 2-10 spread was unchanged at 118 bps. We track the 2-10 spread as an indicator of bank margin pressure.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM13

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 5.6% upside to TRADE resistance and 1.8% downside to TRADE support.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


CHART OF THE DAY: Got #Deflation And #GrowthSlowing? What Rallied (And Tanked) Last Week

CHART OF THE DAY: Got #Deflation And #GrowthSlowing? What Rallied (And Tanked) Last Week - 01.19.16 chart image

 

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... Last week’s macro market moves simplified that both #Deflation and #GrowthSlowing are bearish TRENDs where you can be LONG:

 

  1. USD: US Dollar Index up another +0.4% on the week to $98.95
  2. Long-term Bonds: US 10yr Treasury Yield down another 8 basis points on the week to 2.03%
  3. Utilities (XLU) up +0.7% on the week to +0.3% YTD

 

While the Utes Long Bond Cash Is King position worked, not all “yield chasing” or “growth in a slow-growth environment” did:

 

  1. MLP’s got smoked for another -10.7% weekly loss and are already -18.6% YTD on the Alerian MLP ETF
  2. Financials (XLF) underperformed the SP500 (again) losing another -3.1% on the week to -10.1% YTD
  3. High Beta (as a US Equity Style Factor) got crushed for another -6.3% weekly loss to -15.3% YTD" 

Simplifying The Complex

“Simplifying as much as possible is crucial to success.”

-Jocko Willink

 

I hope everyone had a nice long weekend. Two weeks into this 2016 bear market battle, I’m sure everyone needed a break. I spent my weekend coaching at a hockey tournament down in Bethlehem, Pennsylvania. The kids (and parents) had a blast keeping life simple.

 

“Simple: the principle isn’t limited to the battlefield. In the business world, and in life, there are inherent complexities. It is critical to keep plans and communication simple. Following this rule is crucial to the success of any team.” (Extreme Ownership, pg 140)

 

At Hedgeye, our team takes our core principles of Transparency, Accountability, & Trust very seriously. While they are simple principles – executing on them across our entire business requires a commitment to put the team ahead of individuals. Simple is not easy.

 

Back to the Global Macro Grind

 

Nope. Simple is not easy. In fact, simplifying the complex nature of a Global Macroeconomic System is very hard to do. That’s why, as a base layer, we use Chaos Theory. That way we can embrace both the non-linear nature of the system and all of its uncertainties.

 

Simplifying The Complex - Slow growth cartoon 09.11.2015 copy

 

After we’ve done all of our research, we try to “boil it down” into three Global Macro Themes. While our quarterly themes may vary in terms of their “creative” hashtags, they’ve simplified two of the most basic things an investor should have prepared for in the last 6 months:

 

  1. GROWTH slowing
  2. INFLATION deflating

 

If you missed it, that happens. Don’t keep missing it. “Should have, could have, would have” are the kinds of excuses we don’t let players on our team get away with. However many mistakes we make, it’s always about learning, evolving, and moving forward.

 

When things go wrong, and they inevitably do go wrong, complexity compounds issues that can spiral out of control into total disaster. Plans and orders must be communicated in a manner that is simple, clear, and concise.” (Extreme Ownership, pg 140)

 

When things go right for the right reasons, your team builds confidence that you’ve helped them simplify the complex.

 

Look at what drove the SP500 down another -2.2% on Friday to -8.0% YTD and -11.7% from its July 2015 #Bubble high:

 

  1. US Industrial Production “growth” for DEC slowed another -0.4% month-over-month to -1.8% year-over-year
  2. US Producer Prices (PPI) for DEC slowed another -0.2% month-over-month to -1.0% year-over-year
  3. US Retail Sales growth (“control group” used to calculate GDP) slowed -0.3% month-over-month to +2.4% year-over-year

 

And while a consensus growth bull might call Retail Sales “not bad”, we continue to remind you that absolutes don’t matter in macro – rate of change does. Put simply: good or bad doesn’t matter; it’s all about things getting better or worse.

 

To be clear, there is a large (consensus) community of investors who thought things couldn’t get any “worse” than they looked in SEP of 2015. They saw the impressive counter-TREND bounce in everything “reflation” as a signal that all the bad was “priced in.” Not so much.

 

Last week’s macro market moves simplified that both #Deflation and #GrowthSlowing are bearish TRENDs where you can be LONG:

 

  1. USD: US Dollar Index up another +0.4% on the week to $98.95
  2. Long-term Bonds: US 10yr Treasury Yield down another 8 basis points on the week to 2.03%
  3. Utilities (XLU) up +0.7% on the week to +0.3% YTD

 

While the Utes Long Bond Cash Is King position worked, not all “yield chasing” or “growth in a slow-growth environment” did:

 

  1. MLP’s got smoked for another -10.7% weekly loss and are already -18.6% YTD on the Alerian MLP ETF
  2. Financials (XLF) underperformed the SP500 (again) losing another -3.1% on the week to -10.1% YTD
  3. High Beta (as a US Equity Style Factor) got crushed for another -6.3% weekly loss to -15.3% YTD

 

Put more simply: High Beta Small Cap Leverage = not good.

 

So is Mr. Macro Market pricing in a recession or a depression at this point? In asset price inflation terms, I think that’s a more reasonable question than trying to debate whether or not US and Global GDP growth is going to be +3-4%.

 

I can assure you that where I was in Pennsylvania this weekend, the cyclical/industrial #Recession is very much on. Check in with a farmer in Des Moines, Iowa or a real-estate agent in Houston, Texas and they’ll simplify the same. It’s not that complicated.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.00-2.13%

SPX 1
RUT

DAX 9

VIX 18.89-29.88
Oil (WTI) 28.51-32.38

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Simplifying The Complex - 01.19.16 chart image


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The Macro Show Replay | January 19, 2015

 


Last Week Was Ugly

Client Talking Points

U.S. DATA

Let’s not forget we had a trifecta of “misses” on Friday with Industrial Production and Producer Prices (PPI) in recessions at -1.8% and -1.0% year-over-year, respectively (and control group for Retail Sales only +1.5%). The U.S. 10YR Yield broke 2.0% intraday (and should have on that data) and GDP is a lot slower than consensus (our favorite Macro Long idea remains the Long Bond).

SECTORS

U.S. Equity Sector Styles continue to reflect #Recessionary expectations accelerating, with Utilities (our favorite sector currently) +0.7% last week (+0.3% year-to-date) and Basic Materials -4.5% on the week (-11.9% year-to-date) and Financials -3.1% on the week (-10.1% year-to-date) underperforming what’s an already -8.0% year-to-date S&P 500.

DAX

They’re bouncing the DAX (again) +1.8% this morning, but don’t forget both Germany and Spain remain in #crash mode (-22% and -27%, respectively vs. 2015 highs). We’ll see what ECB President Mario Draghi can do on Thursday – whatever he thinks he can do is probably U.S. Dollar bullish (Euro bearish) and deflationary, in Dollars.

 

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

Asset Allocation

CASH 66% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 22% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
XLU

We added Utilities (XLU) on the long-side last Friday as the market continued to pummel everything we haven’t liked (high debt, high beta, and small-cap stocks leveraged to inflation expectations) – Utility stocks are low-beta, slow-growth bond proxies which is why they are by far the best relative performer year-to-date.

 

XLU is outperforming the S&P 500 by +7% and remains flat on the year. Friday’s large swath of data echoed what we have been saying for a while now on the deflationary risk of an industrial recession.

GIS

GIS led a $3 million funding round for kale chip maker Rhythm Superfoods. Although this is not a big deal and will most likely never make a strong impact to top or bottom line, it marks a changing in the tide for management thinking. They are making a distinct effort to delve deeper into the natural and organic category which will help them a lot in the long run.

 

Although the overall market has been atrocious year to date, down roughly -8%, GIS with its low beta, big cap, style factors has held in, down just -5%. We continue to like General Mills as a LONG, especially during the tumultuous times in the market.

TLT

With growth continuing to slow and volatility breaking out to the upside across asset classes, we expect the unwinding of a record amount of corporate credit leverage to continue. We’d put that deleveraging in the third or fourth inning currently. Credit spreads will continue to widen. That's why you're long TLT (and short JNK).   

Three for the Road

TWEET OF THE DAY

The Unintended Consequences Of ZIRP On Commodities https://app.hedgeye.com/insights/48514-commodities-and-the-unintended-consequences-of-the-fed-s-zirp… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

I have decided to stick with love. Hate is too great a burden to bear.

Martin Luther King Jr.

STAT OF THE DAY

President Obama is planning to insert $4 billion into the 2017 budget for a 10-year plan to support and “accelerate” vehicle automation projects (self-driving cars).


HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle

Takeaway: With markets melting down, exchange volume is exploding exponentially higher.

Another -2% drawdown in the S&P 500 during the week was enough to explode exchange traded volume exponentially higher as investors quickly attempt to reallocate capital in light of weakening economic data. Cash equity volume in the young 1Q16TD is already up +30% Y/Y, with options activity up +26% from 1Q15, and futures higher by +17% from last year. The exchanges are late cycle defensive stocks. Looking at 2007 as a test case, both CME Group (CME) and the Intercontential Exchange (ICE) continued to rise by +34% and +79% respectively in '07 after the Financials sector SPDR, the XLF, rolled over after highs in June to finish the year down -22%. As years of a low VIX and bull market complacency line up to sell equity, fixed income, and anything in between, exchange volume benefits greatly at the end of expansions. Our analysis of the few Financial sectors that work late cycle include Fin Tech, the E-Brokers, and the Exchanges.

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - 2007 test case final

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - across cycle

 

Enjoy the best weekend in Pro Football. We like the Panthers to continue the best winning streak in the league (they have won 20 of their past 22) and look for Big Red to upset those Pats in Foxboro.  

 

Weekly Activity Wrap Up

This week, cash equity trading volume came in at 9.4 billion trades per day, bringing the quarter's ADV to 8.7 billion. Options traders exchanged 20.5 million contracts per day, bringing the 1Q16TD average to 19.6 million. Futures activity came in at 25.2 million contracts per day, bringing the 1Q16TD average to 23.3 million.

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon1

  

U.S. Cash Equity Detail

U.S. cash equities trading came in at 9.4 billion shares per day this week, averaging with last week to bring the 1Q16 average so far to 9.0 billion shares per day. That marks +30% Y/Y and +27% Q/Q growth. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 24% share of first-quarter volume, which is consistent with the prior quarter and year-ago quarter, while NASDAQ is taking a 19% share, +40 bps higher Q/Q but -108 bps lower than one year ago.

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon2

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon3

 

U.S. Options Detail

U.S. options activity came in at a 20.5 million ADV this week, bringing the 1Q16TD average to 19.6 million, a +26% Y/Y and +22% Q/Q contraction. In the market share battle amongst venues, NYSE/ICE has been trending downward at a moderate pace, but at an 18% share it is +95 bps higher than the year-ago quarter. Meanwhile, NASDAQ's recent declines bring it -421 bps lower than 1Q15. CBOE's market share is down -106 bps Y/Y, but its decline seems to have stabilized recently; its 27% share of 1Q16TD volume is up +172 bps from 4Q15. BATS and ISE/Deutsche have been taking share from the competing exchanges, with BATS up to a 10% share from 9% a year ago and ISE/Deutsche taking 16%, up from 13% a year ago.

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon4

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon5

 

U.S. Futures Detail

19.5 million futures contracts traded through CME Group this week, bringing the 1Q16TD average to 17.7 million, a +18% Y/Y and +34% Q/Q expansion. CME open interest, the most important beacon of forward activity, currently tallies 102.1 million CME contracts pending, good for +9% growth over the 93.7 million pending at the end of 4Q14, an improvement from last week's +2%.

 

Contracts traded through ICE came in at 5.7 million per day this week, bringing the 1Q16TD ADV to 5.7 million, +13% Y/Y and +19% Q/Q growth. ICE open interest this week tallied 66.1 million contracts, a +11% expansion versus the 59.4 million contracts open at the end of 4Q14, an improvement from last week's +8%.

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon6

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon8

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon7

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon9 

 

Monthly Historical View

Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon10

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon11

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon12

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon13

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon14

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon15

 

Sector Revenue Exposure

The exchange sector has broadly diversified its revenue exposure over 10 years as public entities with varying top line sensitivity to the enclosed trading volume data. The table below highlights how trading volumes will flow through the various operating models at NASDAQ, CME Group, ICE, and Virtu:

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon19 3

 

 

Please let us know of any questions,

 

Jonathan Casteleyn, CFA, CMT 

  

  

 

 Joshua Steiner, CFA

 

 

 

 


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