Steen's Chronicle: The old and the new economic order

On a day where everyone wants to read the tea leaves from Jackson Hole I have put a finishing touch to my new economic theory. Some of you know I have been very disappointed not to be considered with my "Triangle of economics" so here comes the new version:

 

The first model describes the world and its parameters:

 

We live in FIAT economy where growth is fueled by debt, and less and less from productivity & demographics. It happens in a closed circuit with US$ as the reserve currency.

 

The problem now is that the "models Black box" the economy can not get restared without changes to one or several parameters…..

 

 

The banking system is moving from 20-30x leverage to maximum 10x

 

Input costs is rising….

 

Cost of capital been rising since September last year….

Unit labor cost is about to rise significantly due to in-equality, social tension and simple shortage of qualified workers….

 

Output is falling..

 

Profit has been flat to lower…..

Job been….. relative to population is at best unchanged at worst falling…

 

The new business model is to adjust to slower if not unchanged growth – getting bigger market share via better products or service, something which has totally been forgotten in the new world of "digitalization" where the D stands for "dumbing down" in my opinion…

 

New models:

 

 

 

Of course above will be explained and detailed more, but I felt/fell it explains well how and why the US$ leads everything…….

 

Safe travels,

 

Steen

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

This email may contain confidential and/or privileged information.
If you are not the intended recipient (or have received this email
by mistake), please notify the sender immediately and destroy this
email. Any unauthorised copying, disclosure or distribution of the
material in this email is strictly prohibited.

Email transmission security and error-free status cannot be guaranteed
as information could be intercepted, corrupted, destroyed, delayed,
incomplete, or contain viruses. The sender therefore does not accept
liability for any errors or omissions in the contents of this message
which may arise as a result of email transmission.

Parity risk, VaR and blow-up risk - MUST READ fro everyone! (hat-tip: jc)

 

http://www.zerohedge.com/news/2015-08-27/jpm-head-quant-warns-second-market-crash-may-be-imminent-violent-selling-could-retur

 

use link for full charts

 

Home> JPM Head Quant Warns Second Market Crash May Be Imminent: Violent Selling Could Return On Thursday 

 

JPM Head Quant Warns Second Market Crash May Be Imminent: Violent Selling Could Return On Thursday 

 

By Tyler Durden

 

Created 08/27/2015 - 14:20

Last Friday, when the market was down only 2%, we presented readers with a note [9]which promptly became the most read piece across Wall Street trading desks, which was written by JPM's head quant Marko Kolanovic, who correctly calculated the option gamma hedging imbalance into the close, and just as correctly predicted the closing dump on Friday which according to many catalyzed Monday's "limit down" open.

 

Recall[9]:

Given that the market is already down ~2%, we expect the market selloff to accelerate after 3:30PM into the close with peak hedging pressure ~3:45PM. The magnitude of the negative price impact could be ~30-60bps in the absence of any other fundamental buying or selling pressure into the close.

[10]

 

We bring it up because Kolanovic is out with another note, one which may be even more unpleasant for bulls who, looking at nothing but price action, were convinced that after the biggest two day market jump in history, the worst is behind us. 

 

In the just released note, the head JPM quant warns that a large pool of assets controlled by price-insensitive managers including derivatives hedgers, Trend Following strategies (CTAs), Risk Parity portfolios and Volatility Managed strategies, which is programmatically trading equities regardless of underlying fundamentals, is about to start selling equities, "andwill negatively affect market in coming days and weeks." For good measure, he casually tosses the word "crash" in the note as well.

 

By way of reference, JPM notes that a good example of how price-insensitive sellers can cause market a disruption/crash is the price action on the US Monday open. It says that technical selling related to various hedging programs, in an environment of low (pre-market) liquidity indeed caused a 'flash crash' on Monday's open. S&P 500 futures hit a 5% limit down preopen, and then a 7% limit low at 9:31 and 9:33. The inability of hedgers to short futures spilled over into large cap stocks that were still trading and could be used as a proxy hedge.Had it not been for the futures limit down event, the selloff would likely have been worse as indicated by the price of the index implied by individual stocks.The figure below shows the S&P 500 futures, SPY ETF and S&P 500 replicated from

the largest stocks that were trading near the market open.

 

 

Kolanovic correctly takes credit for his prediction and notes that "in our Friday note we forecasted end-of-the-day selling pressure due to option gamma hedging. We saw similar price impacts on Thursday, Friday, and Monday (pushing the market lower into the close) and an upside squeeze on Wednesday. Our estimate is that up to 20% of market volume was driven by hedging of various derivative exposures such as options, dynamic delta hedging programs, levered ETF stop loss orders, and other related products and strategies (note that levered ETFs have gamma exposure of only ~$1bn per 1%, i.e., much smaller than that of S&P 500 options). We estimate the cumulative selling pressure from options hedging during the market selloff to be ~$100bn. Options gamma is expected to remain substantially (in excess of $20bn) tilted towards puts while the S&P 500 is between 1850 and 2000.

 

The figure below shows Put-Call Gamma assuming current open interest and different spot prices. JPM expects high volatility to persist (should we stay in this price range) and cause quick intraday moves up or down, particularly towards the end of the trading day.

 

[11]

 

According to the quant, it is not only derivative hedgers who are pushing the market around like a toy with barely any resistance: :in fact, there is a much larger pool of assets that is programmatically trading equities regardless of underlying fundamentals." 

 

It is these investors who, "in the current environment" are selling equities and "will negatively impact the market over the coming days and weeks."

 

 

Trend Following strategies (CTAs), Risk Parity portfolios, and Volatility Managed strategies all invest in equities based on past price performance and volatility. For instance, in our June market commentary we showed that if the equity indices fall 10%, these trend followers may need to subsequently sell ~$100bn of equity exposure. These types of 'price insensitive' flows are starting to materialize, and our goal is to estimate their likely size and timing. These technical flows are determined by algorithms and risk limits, and can hence push the market away from fundamentals.

 

This is where it gets scary for the bulls who thought we may be out of the woods, and that the crash was behind us. If Marko is right, as of this moment we are merely in the eye of the hurricane:

 

 

The obvious risk is if these technical flows outsize fundamental buyers. In the current environment of low liquidity, they may cause a market crash such as the one we saw at the US market open on Monday. We attempt to estimate the amount of these flows from three groups of investors: Trend Following strategies (CTA), Risk Parity portfolios, and Volatility Managed strategies. These investors follow different signals and have different rebalancing time frames. The time frame is important as it may give us an estimate of how much longer we may see selling pressure.

 

So, how much longer may we see the selling pressure? 

 

1. Volatility Target (or Volatility Control) strategies provide the most immediate selling as a reaction to the increase in volatility. These strategies adjust equity leverage based on short-term realized volatility. Typical signals are 1-, 2-, or 3-month realized volatility. Volatility target products are provided by many dealers, index providers and asset managers. Volatility targeting strategies also became very popular with the insurance industry. After the 2008 financial crisis, many Variable Annuity (VA) providers moved from hedging their equity exposure with options to investing directly in volatility target indices (e.g., 10% volatility target S&P 500). It is estimated that VA issuers have ~$360bn in strategies that are managing volatility; some of these use options to manage tail risk, some buy low volatility stocks, and some invest in volatility target strategies. We estimate that strategies that are targeting a particular level of  volatility or managing to an equity floor could have $100-$200bn of assets.

 

Assuming that, on average, these strategies follow a 2-month realized volatility signal, we can estimate their selling pressure. 2M realized volatility increased over the past week from ~10% to ~20% (i.e., doubled), so these strategies need to reduce equity exposure by up to ~50% to keep volatility constant. This could lead to $50-$100bn of selling, and it likely started already this week. There is often a delay of 1-3 days between when a signal is triggered and trade implementation, and positions are often reduced over several days. We think  this could have contributed to the 'unexpected' selloff that happened in the last hour of Tuesday's trading session. While these flows may continue to have a negative impact over the next few days, they would be the first to reverse (start buying the market) when volatility declines.

 

2. Trend Following strategies/CTA funds have an estimated ~$350bn in AUM.We modelled CTA exposures in our May and June commentaries, and estimated flows under different scenarios for asset prices. In particular, under a 10% down scenario in equites we estimated CTAs need to sell ~$100bn of equities. In our model, the bulk of selling was in US markets, some in Japan and relatively little in Europe. S&P 500 futures did underperform Europe (by ~3%) and Japan (by ~2%) over the last two trading sessions (European hours), which may indicate that CTA flows have started to impact equity markets. The rebalance time frame for CTA strategies is typically longer than for volatility control strategies. CTA funds may act on their signal in a period that ranges from several days to a month.We believe that selling from CTAs may have just started and will continue over the next several days/weeks.

 

3. Risk Parity is one of the most popular and (historically) successful portfolio construction methodologies. Risk Parity allocates portfolio weights in proportion to assets' total contribution to risk (a simplified version, called Equal Marginal Volatility allocates inversely proportional to the asset's realized volatility). In a survey of quantitative investment managers (~800 clients in US and Europe), we found that ~50% prefer a Risk Parity approach (vs. 15% for traditional fixed weights (e.g., 60/40), 20% Markowitz MVO, and ~20% active asset timing). Estimated assets in Risk Parity strategies are ~$500bn and ~40% of these assets may be allocated to equities. Risk Parity portfolios may also incorporate leverage, often 1-2x. Risk parity funds often rebalance at a lower frequency (e.g., monthly, vs. daily for volatility target) and use slower moving signals (e.g. 6M or 1Y realized volatility). The increase in equity volatility and correlation would cause Risk Parity portfolios to reduce equity exposure. For instance, 6M realized volatility increased from 11% to 15% and a modest increase in correlations would result in approximately a ~20% reduction of equity exposure. Based on our estimate of Risk Parity equity exposure, this could translate into $50bn-$100bn of selling over the coming weeks.

 

[12]

 

 

In summary, JPM estimates that "the combined selling of Volatility Target strategies, CTAs and Risk Parity portfolios could be $150-$300bn over the next several weeks. Rebalancing of these funds may appear as a persistent and fundamentally unjustified selling pressure as these funds execute their programs. In addition, there may be a positive feedback loop between all of these sellers – Gamma hedging of derivatives causes higher market volatility, which in turn leads to selling in Risk Parity portfolios, and the resulting downward price action invites further CTA shorting. All of these flows pose risk for fundamental investors eager to buy the market dip. Fundamental investors may wish to time their market entry to coincide with the abatement of these technical selling pressures."

 

* * * 

 

In other words, if JPM is right, yesterday and today are merely the eye of the hurricane - enjoy them; tomorrow is when the winds return full force.

 

 

Source URL:http://www.zerohedge.com/news/2015-08-27/jpm-head-quant-warns-second-market-crash-may-be-imminent-violent-selling-could-retur

 

 

This email may contain confidential and/or privileged information.
If you are not the intended recipient (or have received this email
by mistake), please notify the sender immediately and destroy this
email. Any unauthorised copying, disclosure or distribution of the
material in this email is strictly prohibited.

Email transmission security and error-free status cannot be guaranteed
as information could be intercepted, corrupted, destroyed, delayed,
incomplete, or contain viruses. The sender therefore does not accept
liability for any errors or omissions in the contents of this message
which may arise as a result of email transmission.

Macro Digest - Final verdict: Ouch.... one more re-test of low likely into Jackson Hole and then FED Sept. meeting

Market was betting on Fed Atlanta's Lockhart to come to the rescue but he merely restated that a hike in 2015 is very much on the cards:

 

https://www.frbatlanta.org/news/speeches/2015/0824-lockhart?d=1&s=tw

 

Here is my basic Macro call as per pm note:

 

Today's earlier updates:

 

The US Dollar is leading this move: https://www.tradingfloor.com/posts/macro-digest-usd-your-main-catalyst-6032712

 

Targets reached in equity markets: https://www.tradingfloor.com/posts/macro-while-panic-is-sneaking-into-market-note-this-we-have-reached-all-of-our-targets-today-6045637

 

The basic premises underlying my calls:

 

1.)    Market price action dictates direction – traditional support levels was broken violently. Today market was the MOST ENERGIZED sell-off since 2008/2009.

2.)    The US$ lead this crisis and will lead back up when low is in….

3.)    We have reached most of my technical targets and below is my primitive "expected" path from here. (2015 low getting established)

4.)    We will see recession by H1-2016 combined with lows in all cycles – this past week was a "starter" to a bigger menu post FED (Sep/Dec or not at all)

5.)    Fed should move in September, failing to do so could delay FED all the way to 2017 based on 4.)  (Fed is now 24% likely to move acc. to market down from 50% one-week ago). The reason they "should" move is that the market and economy need a higher nominal "clearing yield" to get going again, but more on that later this week.

 

 

Here is the most important Tweets I have seen tonight:  All of them can be found in my Tweeter feed:

 

https://twitter.com/Steen_Jakobsen

 

 

Bullish percentage at extreme lows…

 

 

 

And now add 566 points for Aug 24^th…..

 

 

 

 

Net changes since China devalued ------

 

 

 

 

Jackson Hole now KEY EVENT….

 

Stanley Fischer is speaking … will he last minute change his speech as Draghi did last year – doubt it…..

 

 

 

The sheer magnitude for everyone to see (& understand)

 

 

 

Illustrations of how IMPORTANT net changes YoY in oil prices are for business cycles….

 

 

 

 

 

Fed probability to hike…. 20% down from 50% one week ago:

 

 

 

 

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

This email may contain confidential and/or privileged information.
If you are not the intended recipient (or have received this email
by mistake), please notify the sender immediately and destroy this
email. Any unauthorised copying, disclosure or distribution of the
material in this email is strictly prohibited.

Email transmission security and error-free status cannot be guaranteed
as information could be intercepted, corrupted, destroyed, delayed,
incomplete, or contain viruses. The sender therefore does not accept
liability for any errors or omissions in the contents of this message
which may arise as a result of email transmission.

Steen's Chronicle: The Good and the Bad news about this market sell-off

A late afternoon update mainly for internal consumption (but feel free to forward to clients with relevant disclaimers)

 

Today's earlier updates:

 

The US Dollar is leading this move: https://www.tradingfloor.com/posts/macro-digest-usd-your-main-catalyst-6032712

 

Targets reached in equity markets: https://www.tradingfloor.com/posts/macro-while-panic-is-sneaking-into-market-note-this-we-have-reached-all-of-our-targets-today-6045637

 

The basic premises underlying my calls:

 

1.)    Market price action dictates direction – traditional support levels was broken violently. Today market was the MOST ENERGIZED sell-off since 2008/2009.

2.)    The US$ lead this crisis and will lead back up when low is in….

3.)    We have reached most of my technical targets and below is my primitive "expected" path from here. (2015 low getting established)

4.)    We will see recession by H1-2016 combined with lows in all cycles – this past week was a "starter" to a bigger menu post FED (Sep/Dec or not at all)

5.)    Fed should move in September, failing to do so could delay FED all the way to 2017 based on 4.)  (Fed is now 24% likely to move acc. to market down from 50% one-week ago). The reason they "should" move is that the market and economy need a higher nominal "clearing yield" to get going again, but more on that later this week.

 

 

 

 

Strategy next few weeks into FED crucial September meeting

 

We are close to have exhausted the downside for now – however in classic fashion there should and will be re-test of 9.300 DAX and 1825/30 in S&P before we can move up.  

 

I firmly believe US$ is leading this sell-off – All "evils" comes from the way the monetary system creates debt mainly in US$ and then recycle capital back to US capital markets. China have allowed themselves to "question" this recycling & FIAT money system but allowing market based prices to dictate CNY and down the line activating the Silk Road project.

 

Here is simple explanation of why I think US$ leads the markets:

 

 

US$ gets stronger             è Increases price of servicing massive US$ debt è creates devaluation to maintain export share

è reduces commodity prices è reduce growth for emerging market economies è exporters lose market

US$ gets weaker è commodity rises è reduces burden on debt and commodities è re-sets growth higher.

 

We live in a FIAT economy with the US dollar as the reserve currency. Since the financial crisis started we have seen a massive amount of increase in total debt – McKinsey estimates that global has risen by 57.000 bln. USD since 2007 – I will let you think about that number for another two minutes! It has made global debt to GDP ratio rise by 17% percentage points (Avg. is >200% debt to gdp)…..so..

 

57 trillion US Dollar of new debt has kept the world economy alive…..but most of that debt has been created by EM economies which borrowed cheap in US Dollar and invested into the domestic economy. Now as US Dollar peaked so did "debt burden" and at a time where the strong US  Dollar also made the commodities the cheapest in 15 years – hence no real income.

 

The credit cycle – as in credit spreads – hit all-time low in autumn of 2014 – the first sign of "cost of capital" rising – CoC – since it has been one way and its up in price of money.

 

Then the US dollar peaked – DXY – in May, and then stock market in July/August. The peak in US$ co-incided with "final move" down in commodities driven by perfect storm: Strong US Dollar and higher cost of capital which equates to a HUGE margin call on US denominated debt – which all EM countries have, hence making whether they are net importer or exporter less relevant. Add to this a massive de-leveraging cycle in banking through regulation and the cost of capital will remain elevated to the level seen in the autumn of 2014.

 

The US$ led us into this correction and it will lead us out through the mechanics of the above.

 

Now below the chars for:

 

S&P-500,Shanghai,  FTSE, AUD, 10 YR US…

 

 

 

 

 

 

 

Conclusion:

 

The market would not have "allowed" such a deep correction in 2010,2011,2012,2013 or 2014, and the fact we did have this move today partly confirm my theory that we are moving towards a status/mode where monetary policy CAN'T help, where central banks increasingly is acknowledging that disadvantages of too low policy rates outweighs advantages. The early beginning of the end for Pretend-and-extend?

 

We basically have seen the early start of a true business cycle which allows for correction, resetting of prices and a better marginal cost of capital structure – if today felt heavy/bad then cheer and realize that the economy will come stronger out of this is this conclusion is confirmed.

 

Finally,

 

Please admire the skill of this young lady!!!

 

http://ftw.usatoday.com/2015/08/girls-softball-trick-shot-is-better-than-any-bat-flip-youll-ever-see

 

 

Safe travels,

 

Steen

 

PS:

 

Sometimes a picture tells a better story – from my live interview with Danish TV2 today… note the "bear"…..

 

 

 

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

This email may contain confidential and/or privileged information.
If you are not the intended recipient (or have received this email
by mistake), please notify the sender immediately and destroy this
email. Any unauthorised copying, disclosure or distribution of the
material in this email is strictly prohibited.

Email transmission security and error-free status cannot be guaranteed
as information could be intercepted, corrupted, destroyed, delayed,
incomplete, or contain viruses. The sender therefore does not accept
liability for any errors or omissions in the contents of this message
which may arise as a result of email transmission.

Macro Digest: Quick Strategy Update: US$ is your lead CATALYST...

 

We are now 75% of the way in terms of correction – VaR explosion is driving momentum and the marginal selling…..

 

Levels:

 

I have taken back (in system overrule) short in S&P and DAX, remain long EURSD and Gold.

 

S&P: Target 1875/1825  (another 5-6%)

Dax: 9310(9400

 

These levels fit correction depth and magnitude of prior moves. Chart to follow this pm.

 

Bank sector should hurt the most due to much flatter yield curve…..

 

 

 

 

Timeline:

 

We will be looking at FED hike still… September now priced @ 30% probability and December @ 56% - in other words – unlike other BTFD scenario's we don't have "guaranteed" support from US monetary policy, I still see Fed hiking as markets and price of money needs to clear at a higher interest rate price: ie. 100-200 bps higher. The September FED event will keep market nervous and highly volatile into the actual meeting.

 

Macro drivers:

 

The US$ is EVERYTHING – the DXY now leads the stocks market with R2 of 80%....... hence the "sell-off" in US$ over last three trading session is NET POSITIVE…….for markets/support.

 

Overall this correction was born not by China devaluation but by having a FIAT economy driven US$ debt….. the strong US$ hurt commodities, lower commodities hurt fiscal and FX rates in high volume growth countries (EM+ CHINA) and now full cycle to export driven markets like Germany and Europe overall.

 

Watch the US$ for LEAD in support or lack of it in markets.

 

OVERALL:

 

If my WEAKER US$ get further confirmation I will be looking to add Emerging markets to my portfolio

 

 

Full Steen's Chronicle this p.m

 

Steen

 

 

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

This email may contain confidential and/or privileged information.
If you are not the intended recipient (or have received this email
by mistake), please notify the sender immediately and destroy this
email. Any unauthorised copying, disclosure or distribution of the
material in this email is strictly prohibited.

Email transmission security and error-free status cannot be guaranteed
as information could be intercepted, corrupted, destroyed, delayed,
incomplete, or contain viruses. The sender therefore does not accept
liability for any errors or omissions in the contents of this message
which may arise as a result of email transmission.

Macro Digest: Macro Chart (Saxo Macro + Daily Shot)

Some good charts this morning..

 

Market off  by 7.000 billion US$

 

 

Net moves since China devaluation (t+11 days)

 

 

 

VIX vol above Greek crisis (See chart from Daily Shot below) but even FI volatility rising

 

 

 

The ULTIMATE risk-indicator AUDJPY broken its support (AUD = commodity, China, US$, global growth, JPY =deflation ,risk aversion, zero growth)

 

 

Market is under "attack" – cheap, getting cheaper?

 

 

 

Government bond yield falling – EVERYTHING else in FI rising… Cost of capital to "real" economy continues to rise…

 

 

 

 

Allow me to recycle my Wednesday piece: Macro Digest – The Holiday is over (https://www.tradingfloor.com/posts/macro-digest-the-holiday-is-over-5954514)

 

 

Below The Daily Shot – easily the best service anywhere for free on internet….

 

 

From: The Daily Shot [mailto:editor@DailyShotLetter.com]
Sent: Friday, August 21, 2015 9:38 AM
To: Steen Jakobsen (SJN)
Subject: The Daily Shot; August 21 - Global Macro Currents

 

Subscribe to the Daily Shot View in your browser The Daily Shot™ Greetings, A healthy dose of risk aversion is finally returning to US equity markets. Here are some indicators of declining risk appetite: 1. VIX jumps to levels we saw during the recent Greek debt crisis.   Source: barchart   2. Equity put option activity has risen.      3. Investment advisors are cutting back equity exposure (as shown by the NAAIM index).   Source:NAAIM   4. Hedge funds are picking more defensive shares.   Source: @vexmark   5. The VIX curve is inverted (contango: spot is higher than futures).   Source: @SoberLook   6. Money market inflows spike.   Source: @pkedrosky     The S&P 500 broke out of its trading range to the downside, with the last leg of the decline taking place after hours.   e-mini S&P500 futures; source: Investing.com     Why did US shares sell off after hours? China of course. The nation's manufacturing PMI (an index measuring broad aspects of manufacturing activity) was below forecasts. Note that a measure below 50 indicates contraction - which is now at the worst level in over 6 years.   Source: ‏Investing.com, Markit   Here is the breakdown of China's manufacturing PMI report. The countrys economic "rebalancing" continues.   Source: ‏Markit     In other China news the PBoC has put the yuan into a new holding pattern at just below ¥6.4 to the dollar. Is this the new peg? Too scary to let the market determine the level?    Source: barchart   As capital flows out, the PBoC is forced to buy the yuan and sell dollars in order to keep the yuan from falling further. That has two effects: 1. China's FX reserves decline and 2. the PBoC is reducing the supply of yuan in the market (tightening monetary conditions). That is in part what has pushed the overnight rate in China higher (chart below shows the overnight SHIBOR). As a result the PBoC has been injecting liquidity all week, pumping (according to Reuters) "150 billion yuan ($23.44 billion) of funds into the banking system this week via open market operations".       The risk-off sentiment worsened globally, pressuring international stock markets. One of the reasons was the spooky pattern of devaluations as nations accelerate the "currency wars". Here is Kazakhstan letting its currency "float".   Source: Investing.com   With the currency devalued, KAZ Minerals, a major mining firm with large presence in the region, can now lower prices and still be profitable. Share price spiked. This puts pressure on prices of industrial commodities and other exports, potentially forcing other nations to devalue as well. See the "chain reaction"?   Source: @fastFT   In fact FX forward markets are showing that a number of other currencies are expected to devalue in the near future - with forward FX rates materially weaker than spot. Here are a couple of examples.   Source: @markets   Source: @markets     Of course the "usual suspects" continued to get hammered as well. 1. The Mexican peso declined to new lows. It will be increasingly tough for Canada's manufacturing to complete, as Mexico becomes the cheapest North American manufacturing hub.   Source: Investing.com   2. The Russian ruble breached RUB 68 to the dollar. I am expecting the central bank to take some sort of a defensive action shortly if this continues.   Source: barchart   3. Here is the 10-year history of the US dollar vs. the Malaysian ringgit. Ugly.   Source: barchart   And more headlines ....       To make matters worse, some of these nations are experiencing rising yields due to potential inflation or even credit risks. Here is the 10-year Turkish government bond yield.   Source: Investing.com     Moreover, economic reports from many emerging market nations remain sub-par. Here is Brazil's unemployment rate. Terrible.   Source: Investing.com     Weakness in business activity across Asia can be seen in this chart of Cathay Pacific share price (HK-based airline).   Source: @frostyhk     Switching to the Eurozone, the Greek Prime Minister Alexis Tsipras resigned, forcing new elections in September. Tsipras is trying to consolidate power via these new elections as he continues to be pressured by those opposed to the bailout deal. Greek bank shares resumed declines in anticipation of a restructuring across the nation's banking system.   Source: Investing.com     The euro jumped, as the risk-off sentiment forced the carry trade unwind.   Source: Investing.com   The renewed euro strength and falling commodity prices are threatening to undermine the ECB's QE efforts. The one-year inflation expectations (chart below; based on inflation swaps) turned negative again.   Source: @ReutersJamie   The 5-yr Bund yield is also back in negative territory as deflationary risks rise. Draghi is in a tough spot.   Source: Investing.com     Now let's take a look at some unusual activity in US money markets. Here are three trends I am watching. 1. US LIBOR rates     2. Commercial paper rates      3. 6m - 3m treasury bill spread   Source: @SoberLook   Stay tuned ...     Continuing with US short-term rate markets, futures-implied September rate hike probability dropped from 50% just a few days ago to 24%.   Source: barchart   Gold continues to rise as the rate hike delay becomes more probable.   Source: barchart   Outflows from inflation linked bond ETFs present further evidence of weakening inflation expectations.   Source: @Markit     Speaking of fund outflows, here is the situation with US leveraged loan funds.   Source: barchart     Finally, there is some positive news out of the US. Existing home sales materially beat consensus.   Source: Investing.com     Turning to Food for Thought, we have 5 items this morning: 1. Impressive growth in digital media consumption.   Source:  ‏@conradhackett, WSJ   2. According to Bloomberg, "nearly 1 in 3 U.S. coal miners have lost their job in the last 4 years".   Source: ‏ ‏ ‏@markets   3. Demand for wind turbines is on the rise after several years of declines. Will this continue as fossil fuels become relatively cheap again?   Source: @AlexJFMorales   4. According to the Economist, "the share of employed people who work for themselves is still largely below pre-crisis levels".   Source: @EconBizFin   5. Finally, a classic photo from North Korea.   Source: @DPRK_News     Have a great weekend!     I'd like to thank Fitch Solutions for sponsoring the Daily Shot. Sign up for the Inside Credit weekly letter from Fitch.   Visit our friends at On Pepper for alternative investments portfolio management technology.         Thanks to @NickatFP, @MattGarrett3, Josh, and Ycharts.com for helping with research for the Daily Shot.     Contact the Daily Shot: Content related comments, suggestions, questions, letters to the editor: Editor@DailyShotLetter.com Opportunities for sponsorship and announcements for events, services and products: DailyShot@IronCrestPartners.com       Subscribe to the Daily Shot Share Tweet Share Read Later Forward   All content provided by the Daily Shot is for informational and educational purposes only and is not meant to represent trade or investment recommendations. The Daily Shot is not produced by any entity that is registered as an investment adviser with any federal or state regulatory agency.   CONTENT COPYRIGHT© 2015 . ALL RIGHTS RESERVED

This email was sent to sjn@saxobank.com why did I get this?    unsubscribe from this list    update subscription preferences Iron Crest Partners, LLC · 29 West 64th Street · New York, NY 10023 · USA

This email may contain confidential and/or privileged information.
If you are not the intended recipient (or have received this email
by mistake), please notify the sender immediately and destroy this
email. Any unauthorised copying, disclosure or distribution of the
material in this email is strictly prohibited.

Email transmission security and error-free status cannot be guaranteed
as information could be intercepted, corrupted, destroyed, delayed,
incomplete, or contain viruses. The sender therefore does not accept
liability for any errors or omissions in the contents of this message
which may arise as a result of email transmission.