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They Can't Stop the Bleeding

Takeaway: Global equity markets continue to crash alongside faith in central bankers' omnipotence.

They Can't Stop the Bleeding - Global economy cartoon 12.16.2014

 

Whether we're talking about the Fed, ECB, BOJ or PBOC, central planners the world over can't stop the bleeding in global equity markets. 

 

Case in point... more deflation in the Eurozone this morning. The key question for ECB head honcho Mario Draghi ahead of the March 10th meeting is can Draghi snap his fingers and magically change Europe's deflationary reality?

 

Nope. 

 

Here's some related analysis from Hedgeye CEO Keith McCullough from a note sent to subscribers this morning:

 

"European stocks had their slow-volume bounce last week (EuroStoxx600 +1.6% to -9.4% YTD), but resume their crash this morning with the DAX -1.6% (down 13% YTD and -24% from 2015 top) post a #Deflation print of -0.2% y/y for Eurozone CPI (versus 0.3% in January); Swiss 10yr falls to -0.45% as #NIRP (negative interest rate policy) continues to perpetuate #Deflation."

 

Take a look at Germany...

 

 

Here's Spain and Italy...

 

 

In other central planning news, the (up) Yen and (down) Japanese stocks story continues to defy the intent of the BOJ's negative interest rate policy.

 

It's just one more example of the crumbling credibility of central bankers. To be sure, when macro markets wake up to this reality, things are going to get downright nasty. McCullough has dubbed this evolving phenomenon the #BigBangTheory

 

Here's his take on the latest macro market developments out of Japan:

 

"The Yen is ramping (again) vs. USD this morning and that is not a good thing when it comes to the #BigBangTheory as it keeps Japanese stocks (Nikkei -1% overnight and -23.1% since last yr’s high) in crash mode w/ no “G20 help” this weekend."

 

 

Meanwhile, over in China... the PBOC cut the banking system's reserve requirement ratio again by 0.5 percentage points as the economy continues to slow. China's stock market is down 48% since June. Here's what growth slowing looks like in China Shanghai Composite Casino:

 

 

While permabulls pray for more cowbell, we're bullish on growth slowing proxies like Long Bonds (TLT) and Utilities (XLU). 

 

Our message: Fade Central-Planning storytelling...


RTA Live: February 29, 2016

 

 


MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND

Takeaway: Risk is now more positive than negative in the short-term, but the intermediate and longer-term durations still skew negatively.

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - RM11 2

 

Key Takeaway:

Risk has been in modest retreat for the last two weeks alongside an emergent stabilization in oil in the low $30s and the less bad than feared +1.0% GDP print on Friday. We wouldn't take too much comfort from that as risk in Asia continues to creep higher. The Chinese Interbank Rate, a gauge of systematic stress in the Chinese banking system, notched up by 11 bps week over week to 2.05%, its highest level since April 2015. Additionally, the median CDS spread in Asia widened by 5 bps last week, bringing the M/M change to 11 bps. 

 

 

Current Ideas:

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Negative / 4 of 13 improved / 7 out of 13 worsened / 2 of 13 unchanged
• Long-term(WoW): Negative / 1 of 13 improved / 6 out of 13 worsened / 6 of 13 unchanged

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - RM15

 

1. U.S. Financial CDS – Swaps tightened almost across the board for US Financials as 4Q15 GDP came in better than expected. The median contract tightened by -9 bps to 100 last week.

Tightened the most WoW: JPM, C, HIG
Widened the most WoW: MMC, CB, XL
Widened the least/ tightened the most WoW: JPM, TRV, LNC
Widened the most MoM: AIG, MMC, PRU

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - RM1

 

2. European Financial CDS – Swaps were mixed across European banks last week with essentially no W/W change in the median. 

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - RM2

 

3. Asian Financial CDS  Swaps on Asian banks were flat to wider last week, led by the increase at State Bank of India which widened by +13 bps to 195.

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - RM17 2

 

4. Sovereign CDS – Sovereign swaps were mixed last week. On the positive side, Portuguese sovereign swaps tightened the most, by -20 bps to 326. On the negative, Irish swaps widened by +7 bps to 66.

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - RM18

 

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - RM3

 

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Brazilian CDS tightened the most, by 19 bps to 455, as the country's central bank reported that Brazil's budget deficit narrowed in January, although the improvement came from one-time revenue sources.

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - RM16

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - RM20

6. High Yield (YTM) Monitor – High Yield rates fell 28 bps last week, ending the week at 8.56% versus 8.84% the prior week.

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 7.0 points last week, ending at 1789.

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - RM6

8. TED Spread Monitor – The TED spread was unchanged last week at 32 bps.

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - RM7

9. CRB Commodity Price Index – The CRB index fell -0.5%, ending the week at 162 versus 163 the prior week. As compared with the prior month, commodity prices have decreased -3.0%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - 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 widened by 1 bps to 15 bps.

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 11 basis points last week, ending the week at 2.05% versus last week’s print of 1.94%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - RM10

12. Chinese Steel – Steel prices in China rose 2.6% last week, or 54 yuan/ton, to 2125 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - RM12

13. 2-10 Spread – Last week the 2-10 spread tightened to 97 bps, -7 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - RM13

14. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread tightened by 1 bps to 39 bps.

MONDAY MORNING RISK MONITOR | ASIA RISK RISING IN THE BACKGROUND - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


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The Macro Show Replay | February 29, 2016

 


Yen, Europe and UST 10YR

Client Talking Points

YEN

The Yen is ramping (again) vs. USD this morning and that is not a good thing when it comes to the #BigBangTheory as it keeps Japanese stocks (Nikkei -1% overnight and -23.1% since last year’s high) in crash mode with no “G20 help” this weekend.

EUROPE

European stocks had their slow-volume bounce last week (EuroStoxx600 +1.6% to -9.4% year-to-date), but resume their crash this morning with the DAX -1.6% (down 13% year-to-date and -24% from 2015 top) post a #Deflation print of -0.2% year-over-year for Eurozone CPI. The Swiss 10YR falls to -0.45% as #NIRP continues to perpetuate #Deflation.

UST 10YR

The UST 10YR didn’t really budge during last week’s U.S. stock market levitation – more importantly, with the 10YR = 1.74% this morning, the Yield Spread has compressed to another new low of 96 basis points wide (10s/2s) and that keeps the Financials (XLF) as our favorite S&P Sector Short vs. Utes (XLU) long.

 

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

Asset Allocation

CASH 65% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 4%
FIXED INCOME 25% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
XLU

Our preferred growth slowing vehicle remains Utilities (XLU) in equites. Hitting on Friday’s revised GDP report (Q/Q SAAR Q4 GDP revised to +1.0% from +0.7%), a deep-dive into the number doesn’t support an incrementally stronger economy:

  • Consumption was revised down marginally but net exports were up with the negative revision to imports outweighing the negative revision to exports. That’s good for the number but lower global trade activity is not a good sign for global growth;
  • Much of the actual change in the revision was due to inventories, which contributed +0.31pts to the headline number
GIS

General Mills (GIS) hit an all-time high last week when it reached $60.18 on Thursday. Although this would not be a great entry point, it is also not a reason to get out if you have a long-term view. Nothing has changed in our fundamental story and we have no reason to lose faith in our thinking to date.

 

Over the course of the past few years, GIS has made strategic acquisitions within the natural & organic / wellness space (we call it the string of pearls approach). Although they are not largely meaningful to top or bottom-line right now, they are changing the way the company thinks about its broader portfolio.

 

We continue to believe GIS is one of the best positioned consumer packaged foods companies due to its strong brands and best-in-class people and organization.

TLT

Our preferred growth slowing vehicle remains (Long-Term Treasuries) TLT in fixed income. A flattening in the yield spread (10YR Treasury Yield – 2YR Treasury Yield) continued last week into double digit basis point territory (currently at 96 basis points). Year-to-date the yield spread has declined 44 basis points while the 10YR Treasury Yield has dropped 47 basis points. As a reminder the yield curve flattens as the economy slows with policy and/or liquidity management driving the short-end higher and defensive positioning and/or discounting of lower future growth/inflation driving the long end lower. 

Three for the Road

TWEET OF THE DAY

NEW VIDEO | McCullough: How To Think About Volume https://app.hedgeye.com/insights/49431-mccullough-how-to-think-about-volume… cc @KeithMcCullough $IWM $SPY $DJIA

@Hedgeye

QUOTE OF THE DAY

I attribute my success to this: I never gave or took any excuse.

Florence Nightingale

STAT OF THE DAY

There are 7% fewer babies born on leap year day as there are people born on any other day.


CHART OF THE DAY: Eurozone Deflation Hits Equities (Again)

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.

 

"... On that score, after another #Deflation report out of Europe this morning (Eurozone CPI -0.2% y/y FEB vs. +0.3% JAN) and the Chinese panicking with another “RRR cut” (post their stock market dropping another -2.9% overnight), the German DAX just gave back all of last week’s “bounce” (-1.6%) and remains in crash mode at -24.4% from last year’s #bubble peak."

 

CHART OF THE DAY: Eurozone Deflation Hits Equities (Again)  - 02.29.16 Chart


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