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The Filter: Hedgeye's Take On Today's Financial News

Takeaway: As our CEO Keith McCullough is fond of saying, "Risk happens slowly at first, then all at once."

The Filter: Hedgeye's Take On Today's Financial News - brexit 6 27

 

Below is a collection of interesting links and insights from today's news with analysis filtered through our macro lens. This installment discusses the $2 trillion+ stock carnage post Brexit, the "risky trinity" warnings from the Bank for International Settlements, an analysis of Brexit voter demographics, and the latest from global central planners.

 

Enjoy! 

 

market Carnage (continues)

This past Friday's post-Brexit selloff was ... drumroll please ...  the worst day ever for global equities. Literally. According to Reuters, "The $2.08 trillion wiped off global equity markets on Friday after Britain voted to leave the European Union was the biggest daily loss ever, trumping the Lehman Brothers bankruptcy during the 2008 financial crisis and the Black Monday stock market crash of 1987, according to Standard & Poor's Dow Jones Indices." Today's market action isn't exactly inspiring confidence with global markets getting hit hard across the board.

 

Bottom line: So much for the whole "there is no alternative" to stocks narrative. We've been suggesting a steady diet of Long Bonds (TLT), Utilities (XLU) and Gold (GLD) to our subscribers. 

 

Central Bank Watchdog Warnings

On Sunday, the Bank for International Settlements (BIS) warned of a "risky trinity" of conditions. (And no... the central bank watchdog wasn't talking about Brexit.) In its annual report, the BIS warns of: "Productivity growth that is unusually low, global debt levels that are historically high, and room for policy manoeuvre that is remarkably narrow. A key sign of these discomforting conditions is the persistence of exceptionally low interest rates, which have actually fallen further since last year."

 

Bottom line: To which we say, welcome aboard! As our subscribers are well aware, we've been warning about global #GrowthSlowing for quite some time now. Our cartoonist Bob Rich has been all over this.

 

The Filter: Hedgeye's Take On Today's Financial News - Lower for longer cartoon 05.28.2015

 

Brexit Demographics Deep Dive

Voting data crunched by the Financial Times reveals that "Remain" votes came from areas with a high concentration of "degree-educated people" who had higher incomes and were generally older. Another interesting correlation is that "Leave" voters generally hailed from regions most economically dependent on the European Union.

 

The chart below shows "share of Leave vote" to "percentage of region's GDP exported to the EU." This suggests that for a large contingent of British voters the European Union experiment had been largely underwhelming. 

 

The Filter: Hedgeye's Take On Today's Financial News - ft leave

 

Central Planning Shenanigans

Global central banks stand ready to cooperate to stem post-Brexit bleeding, according to the Bank for International Settlements. "Central banks have acted swiftly in the past, they stand ready to act again, and they have the tools," BIS head Jaime Caruana said in the text of a speech to be delivered on Sunday.

 

The Bank of England has offered to provide over 250 billion pounds in addition to "substantial" access to foreign currency to relieve pressured markets, BoE head Mark Carney said. Meanwhile, "The Federal Reserve is prepared to provide dollar liquidity through its existing swap lines with central banks, as necessary, to address pressures in global funding markets, which could have adverse implications for the U.S. economy."

 

And via Bloomberg, "China weakened its currency fixing by the most since last August as global market turmoil spurred by Britain’s vote to leave the European Union sent the dollar surging. The People’s Bank of China set the reference rate 0.9 percent weaker at 6.6375 a dollar."

 

Bottom line: One of our top themes remains a loss of faith in the power of central planners. #BeliefSystem breakdown. It's been (and remains) a gigantic market and economic risk. 

 

...More Central Bank Nonsense? Yup.

Today, following an emergency meeting between Japanese government and Bank of Japan officials, "Prime Minister Shinzo Abe instructed the Finance Ministry and the Bank of Japan to ensure the stability of financial markets and take steps if necessary," according to The Japan Times. Unnamed sources say the "government is ready to provide the economy fiscal support, with an eye on expanding planned stimulus steps to total more than ¥10 trillion."

 

Bottom line: See takeaway above for our view of the breakdown in faith of central planners.


JT TAYLOR: RYAN RELEASES “BETTER WAY” TAX PROPOSAL

RYAN RELEASES “BETTER WAY” TAX PROPOSAL

 

Lost in the fallout of the Brexit vote or even the Democratic sit-in on the floor of the U.S. House of Representatives regarding gun control was Friday's release of the Republican's long-awaited blueprint on tax reform, a 35-page document outlining what the tax code would look like if Speaker Paul Ryan had his way. A few observations before diving in...

 

  • This blueprint only represents the thoughts of Republicans, specifically House Republicans.  

 

  • The blueprint is a narrative, not legislation; nor will it be offered as legislation anytime before the election.

 

  • Congressional Democrats resoundingly condemned it, including Senator Ron Wyden (D-OR) who would be chairman of the Finance Committee if the Senate flips.

 

  • The presumptive presidential nominees were both silent on the matter, and we expect that to remain the case. No matter who wins in November, the president lately drives tax reform (at least for the past 50 years that has been the case), so we're sure whoever is elected will have their own ideas to offer.

 

So, what's in it? Perhaps the most headline-grabbing elements of the plan are the proposed new tax rates: a corporate rate of 20%; a pass-through business rate of 25%; and individual rates of 12%, 25%, and 33% (without identifying the income thresholds).  

 

While not proposing a change to the mortgage interest or charitable deductions, the proposal scraps the remainder of most itemized deductions and instead increases the standard deduction. And on the business side, the blueprint calls for a shift to a territorial tax system while proposing a border adjustment tax on products, services, and intangibles imported into the U.S. Importantly, the blueprint calls for 100% first-year expensing for businesses while removing many business-related deductions and credits from the code, including interest deductibility.

 

So what does it all mean? In our estimation, it's worth noting how much energy and resources House Republicans and Speaker Ryan are devoting to this rollout, even if it's not receiving much play. Of course, Ryan is a former Chairman of both the Budget and Ways and Means Committees; and though in releasing this blueprint he characterized it as a start to a conversation, we're quite certain what he unveiled is a clear indication of where Ryan's baseline negotiation will be with the next president (and perhaps next Senate majority leader and chairman of Senate Finance Committee).  What is crystal clear from this blueprint -- one of six such task force reports the GOP produced over the last month, and probably the one most ripe for deal-making with a potential Clinton presidency -- is that this particular one is more than a messaging document; for Ryan, tax reform is his lodestar, and with this blueprint he wrote his latest chapter. 


MONDAY MORNING RISK MONITOR | THE WRONG RISK

Takeaway: Equity markets reacted violently to Brexit, but our broader set of risk measures, while mostly negative, were far less impacted.

 MONDAY MORNING RISK MONITOR | THE WRONG RISK - RM11

 

Key Takeaway:

Our risk monitor is an interesting animal in that it typically signals risk emerging in non-equities arenas before that risk is reflected in equity prices. Sometimes, however, it works in reverse. Equities get whipsawed, but the various risk monitor signals we track, while directionally consistent, can be characterized as "not impressed". Looking across the different signals this past week, one would assume that nothing overly significant happened. In fact, you'd be hard pressed to point to anything especially out of the ordinary. Either this means Brexit has smaller ramifications than what was priced into equities or these other signals are the lagging indicator(s). 

 

It's obviously difficult to answer this question as no one seems to have a firm grasp on Brexit's longer-term implications for US economic growth, European economic growth, British economic growth, etc. From our vantage point, the big risk facing US investors is not Brexit, but the clear and present deterioration in credit quality and conditions in the US lending market. The lending cycle is very much in its twilight with numerous red flags beginning to arise. We think this should be where investors are focused.

 

 

Our heatmap below is mostly negative across all durations.


Current Ideas:


MONDAY MORNING RISK MONITOR | THE WRONG RISK - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 3 of 13 improved / 4 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Negative / 3 of 13 improved / 7 out of 13 worsened / 3 of 13 unchanged
• Long-term(WoW): Negative / 2 of 13 improved / 3 out of 13 worsened / 8 of 13 unchanged

MONDAY MORNING RISK MONITOR | THE WRONG RISK - RM15


1. U.S. Financial CDS
– Swaps widened for 8 out of 13 domestic financial institutions. Although equity valuations reacted extremely negatively to the Brexit vote, most financials CDS outside large moneycenters seem to either indicate a delayed reaction or that default risk has not risen much. Moneycenter CDS widened by an average 2 bps while consumer finance and insurance companies' CDS tightened by an average -1 bps. On the other hand, outside financials, both the investment grade and high yield North American CDS indices at the bottom of the following table widened notably, by 4 bps to 87 and by 7 bps to 459 respectively.


Tightened the most WoW: MET, COF, PRU
Widened the most WoW: JPM, HIG, BAC
Widened the least WoW: GNW, MBI, AGO
Widened the most MoM: MS, JPM, GS

MONDAY MORNING RISK MONITOR | THE WRONG RISK - RM1

 

2. European Financial CDS – Financials swaps mostly widened in Europe last week as investors recognized the economic implications of the Brexit vote. The median CDS widened significantly, increasing by +9bps to 145.

MONDAY MORNING RISK MONITOR | THE WRONG RISK - RM2

 

3. Asian Financial CDS – While bank CDS in Japan were mostly flat last week, 2 out of 3 Indian banks saw CDS widen, and all 3 Chinese banks saw their CDS widen.

MONDAY MORNING RISK MONITOR | THE WRONG RISK - RM17

 

4. Sovereign CDS – Sovereign swaps mostly widened over last week. Post-Brexit vote, investors are most concerned with Italy and Spain, where CDS widened by +25 bps to 173 and by +23 bps to 129, respectively.

MONDAY MORNING RISK MONITOR | THE WRONG RISK - RM18

 

MONDAY MORNING RISK MONITOR | THE WRONG RISK - RM3


5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week, although movement was fairly mild. The median EM CDS widened by only 1 bps to 189.

MONDAY MORNING RISK MONITOR | THE WRONG RISK - RM16

6. High Yield (YTM) Monitor – High Yield rates fell 9 bps last week, ending the week at 7.18% versus 7.26% the prior week.

MONDAY MORNING RISK MONITOR | THE WRONG RISK - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 6.0 points last week, ending at 1895.

MONDAY MORNING RISK MONITOR | THE WRONG RISK - RM6

8. TED Spread Monitor – The TED spread was unchanged last week at 39 bps.

MONDAY MORNING RISK MONITOR | THE WRONG RISK - RM7

9. CRB Commodity Price Index – The CRB index fell -1.6%, ending the week at 189 versus 192 the prior week. As compared with the prior month, commodity prices have increased 1.4%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | THE WRONG RISK - 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 3 bps to 11 bps.

MONDAY MORNING RISK MONITOR | THE WRONG RISK - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 3 basis points last week, ending the week at 2.04% versus last week’s print of 2.01%. 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 | THE WRONG RISK - RM10

12. Chinese Steel – Steel prices in China rose 0.4% last week, or 10 yuan/ton, to 2349 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 | THE WRONG RISK - RM12

13. Chinese Non-Performing Loans – Chinese non-performing loans amount to 1,392 billion Yuan as of March 31, 2016, which is up +41.7% year over year. Given the growing focus on China's debt growth and the potential fallout, we've decided to begin tracking loan quality. Note: this data is only updated quarterly.

MONDAY MORNING RISK MONITOR | THE WRONG RISK - RM4

14. Chinese Credit Outstanding – Chinese credit outstanding amounts to 149.5 trillion RMB as of May 31, 2016 (data released 6/15/2016), which is up +15.5 trillion RMB or +11.5% year over year. Month-over-month, credit is up +553 billion RMB or +0.4%. Note: this data is only updated monthly.

MONDAY MORNING RISK MONITOR | THE WRONG RISK - RM20

15. 2-10 Spread – Last week the 2-10 spread widened to 93 bps, 2 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | THE WRONG RISK - RM13

16. 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 | THE WRONG RISK - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT



Patrick Staudt, CFA


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Daily Market Data Dump: Monday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Monday - equity markets 6 27

 

Daily Market Data Dump: Monday - sector performance 6 27

 

Daily Market Data Dump: Monday - volume 6 27

 

Daily Market Data Dump: Monday - rates and spreads 6 27

 

Daily Market Data Dump: Monday - currencies 6 27


Our Favorite Macro Call Continues To Pummel The S&P 500

Our Favorite Macro Call Continues To Pummel The S&P 500 - tlt say cheese

 

Got #GrowthSlowing?

 

The bond market does. The 10-year Treasury yield hit an all-time low Friday on the heels of the historic Brexit vote and as the flight to safety trade continues as global growth slows.

 

Here's analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"Our favorite ways to play both US and Global #GrowthSlowing in 2016 continues to be the Long Bond, Gold, and Safe Equity Yields (like Utes) that look like bonds; UST 10yr = all-time lows this a.m. at 1.46% as UK 10yr drops another -13bps breaking 1.0% at 0.96%."

 

Below is a chart of the 10-year Treasury yield Going back to 1962. 

 

Our Favorite Macro Call Continues To Pummel The S&P 500 - 10yr all time low

 

 

For those of you keeping score, here's a look at the year-to-date scorecard of our favorite Macro call, long the Long Bond (TLT), versus the S&P 500:

 

  • TLT: +12.6%

  • S&P 500: -0.32%

 

MORE TO COME...


CHART OF THE DAY: Sector Scorecard | What's Working In 2016

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. 

 

"... If all you do is US Equities, did someone say underweight (short) the Financials vs. Utilities in 2016?

  1. Financials (XLF) hammered on Friday, losing another -5.4% to down -7.3% YTD
  2. Utilities (XLU) did their job for our clients, closing +0.6% on a very red day for Equity Beta at +16.9% YTD"

 

CHART OF THE DAY: Sector Scorecard | What's Working In 2016 - 06.27.16 chart


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