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
| | | | | 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 | | | 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 | | | 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 | | | 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. | | 
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