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The Daily Shot: 29-Sep-17
Energy Markets
Commodities
Equity Markets
Credit
Emerging Markets
Asia
Japan
The United Kingdom
The Eurozone
The United States
Food for Thought
Letters to the Editor



 

Energy Markets

1. The effects of Hurricane Harvey continue to be felt in the energy sector. It’s taking a while to ramp up the Gulf Coast refinery activity back to the pre-hurricane levels. As a result, US refinery inputs remain at multi-year lows.

 

Gasoline production is still declining, keeping prices elevated.

 

2. On the other hand, US crude oil production has recovered.

 

As a result, US oil inventories are still relatively high, especially when measured in terms of days of supply (slower refinery activity means longer time to work off the stockpiles).

 

By the way, US oil output is expected to continue climbing rapidly over the next few years. Here is a long-term forecast.

Source: @Ed_Crooks, @josephncohen

 

3. Crude oil trading in the international markets (Brent) is still significantly more expensive than the US benchmark (WTI).

 

To take advantage of this price differential, oil companies have been exporting record amounts of crude oil. As the Port of Houston opened for business, US oil exports rose to new highs.

 

4. The market anticipates the crude oil overhang in the US to shrink over the months to come. The WTI futures curve beyond the first quarter of next year has moved further into backwardation.

 

5. The refinery activity slump is still visible in the Gulf Coast propane production levels.

 

Increasingly, US propane is headed for Asia.

 

6. Separately, natural gas is expected to continue gaining market share of US electricity production.

Source: Goldman Sachs, @joshdigga

 



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Commodities

1. Industrial commodities remain under pressure. Is this a sign of slower economic activity in China? Below we have nickel and iron ore.

 

 

2. The lumber futures rally continues. Will we see this trend reflected in housing construction costs?

 



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Equity Markets

1. The stock market breadth seems to be improving.

 

2. Homebuilder shares are surging amid tight housing inventories.

 

3. Banks continue to move higher on the back of rising rates and all the talk of corporate tax cuts. Here is the US regional banking index (ETF).

 

4. VIX remains below 10, and the largest ETF used to bet on rising volatility (VXX) keeps tumbling (second chart below).

 

 

A steeper VIX futures curve (contango) accelerates the “decay” in VXX.

 

5. A JPMorgan analyst said that investors should be shorting CBS to take advantage of the NFL protests. Apparently, the bet is working.

Source: Fox Business; Read full article

 

 

6. Finally, when investors look at the float of a particular stock, they should be adjusting for the shares “trapped” inside passive funds/ETFs. The trapped amount is less likely to follow the company’s fundamentals as it “blows in the wind” of index trading.

Source: Goldman Sachs, @joshdigga; Further reading

 



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Credit

1. Are the loose structural characteristics of the leveraged loan market here to stay?

Source: @theleadleft, @TRLPC, @josephncohen; Read full article

 

2. European HY volume is climbing.

 

3. BDCs bounced on Thursday amid a realization that middle market companies should benefit from the proposed tax reform.

 

4. Moody’s is constructive on industrial REITs, but risks remain.

Source: Moody’s Investors Service

 

5. This year’s hurricanes have shaved off about 17% of the value (on average) from cat bonds.

 

Here is the exposure.

Source: @Dealogic; Read full article

 



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Emerging Markets

1. Let’s start with some updates on Argentina.

Marci’s approval ratings have improved as the economy stabilizes.

Source: Moody’s Investors Service

 

The stock market is hitting new records.

 

But fiscal risks remain.

Source: Moody’s Investors Service

 

2. Brazil is still struggling with the private sector credit crunch, but there are signs of improvement.

Source: Goldman Sachs, @joshdigga

 

3. Investors are jumping on (high-yielding) Nigerian bonds.

 

4. Qatar’s stock market slumped again as bank funding worries persist.

 



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Asia

1. The renminbi continues to weaken on higher rates in the US.

 

2. The 7-day SHIBOR is above 3%. Is this just the usual quarter-end blip or is the PBoC tightening monetary conditions further?

 

3. South Korean bond yields are at the highest level since 2015.

 



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Japan

1. JGB yields have also been rising.

 

2. Japan’s industrial production rose 5.5% from last year – faster than expected.

 

3. The national CPI rate has moved into positive territory.

 

However, the Tokyo CPI, which comes out a month ahead of the national figures, remains at zero.

 



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The United Kingdom

1. So far, the Brexit vote has not been as devastating to the economy as many had feared. Nonetheless, some economists see a “slow train wreck” in a hard Brexit scenario.

Source: Moody’s Investors Service

 

2. Here is a dashboard of what happened to the economy since the vote and more recently.

Source: Moody’s Investors Service

 



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The Eurozone

1. It’s becoming increasingly likely that the ECB will announce a QE tapering program next month or shortly after. Here is why.

Consumer and business confidence is at multiyear highs.

 

Below we have the Eurozone business climate index and the industrial sentiment indicator. This does not look like an economy in need of a massive QE effort.

 

 

German “super core” CPI (excluding the volatile components of the index) is climbing.

Source: @fwred

 

Both, consumer (chart below) and market (second chart below) inflation expectations are grinding higher.

 

 

2. Greek bank shares bounced as the IMF/ECB decided to give the lenders a bit of a break.

Source: Reuters; Read full article

 

 

3. Portugal’s bond spreads to Germany continue to tighten.

 



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The United States

1. US initial jobless claims still show the impact of hurricanes Harvey and Irma. This will play havoc with the jobs report next week.

 

2. Business inventories rose more than expected last month.

 

3. There has been further good news from the manufacturing sector. One more regional Fed report beat expectations.

 

4. Here is another chart comparing consumer confidence (expectations) and real consumer spending.

Source: Deutsche Bank, @joshdigga

 

5. Finally, we have some updates on the proposed tax reform.

Goldman sees a modest corporate tax cut and a small reduction in the top pass-through rate (for S-coprs, partnerships, etc.). Also, the bank’s team is predicting a boost in the standard deduction, with all the personal income rates remaining the same.

Source: Goldman Sachs, @joshdigga

 

Some analysts and politicians are very focused on the deficit increases associated with this tax reform proposal. However, a number of countries that cut their tax rates (especially corporate taxes) saw their tax revenue remain the same or even increase. For example, this analysis doesn’t account for more businesses moving to the US because of a friendlier tax regime.

Source: Steven Rattner 

 

Getting rid of the mortgage or state/local income tax deductions will be more painful for the “blue” states.

Source: Steven Rattner 

 

We have some letters to the editor on the topic at the end.




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Food for Thought

1. The competitiveness index for select countries (see more on the topic here).

Source: BMI Research

 

2. Monthly FDA approvals of generic drugs.

Source: Moody’s Investors Service

 

3. The recovery of the horse-trading market.

Source: @business, @josephncohen; Read full article

 

4. Media coverage of the three major hurricanes.

Source: @FiveThirtyEight, @josephncohen; Read full article

 

5. What should happen to all the illegal immigrants working in the US? This poll shows record support for “amnesty.”

Source: @foxnewspoll; Read full article

 

6. The midlife crisis is part of the human condition.

Source: VOX, h/t Mike; Read full article

 

7. States with the highest and the lowest rates of risky behaviors (healthwise).

Source: @business, @josephncohen; Read full article

 

8. Some Saudi women will now be able to get a job because paying drivers was prohibitive for many low-wage workers.

Source: @karadapena, @WSJ, @josephncohen; Read full article

 

9. The UBS Real Estate Bubble Index.

Source: UBS, @joshdigga

 




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Letters to the Editor

These are in reference to the GOP tax proposal.


Nothing personal, Lev, but analysis like raising the standard deduction will be bad for the mortgage deduction is like saying that more effective police patrolling of my neighborhood is bad for the value of my guns and ammo cache. At some point, I have to figure out that a tax efficient, more economically productive milieu is better for me than whatever current deduction or credit I lose.

Raising the standard deduction is a case in point: it allows us to increase economic activity and presumably income without caring how it is done. Thus millions of inventive Americans seeking to maximize personal net worth in the myriad ways limited only by imagination will improve the economy far more than politically targeted, usually short-sighted, favored activity.

Raising the standard deduction is the simplest, easiest way to simplify taxes that I know and should be always supported. A crucial benefit of it is that we then spend our political time on the only important aspect of tax policy: tax rates as a driver of tax revenue. Deductions effectively cause whole classes of citizens to not care about the tax system, and therefore the overall rate, because they are less affected. Bad for policy debate and ultimately bad for democracy.

Mark


I believe this tax plan is aimed at getting all of those dollars held abroad repatriated coupled with a healthy dose of trickle-down economics. For me, the admittedly more emotional issue is on the estate tax. Estate tax can be a method to ensure that there is no permanent hyper-wealthy aristocracy in America. I freely admit my bias about this group since throughout history, from my perspective, the inherited money class has tended to act by any means to retain their wealth and power thus limiting economic mobility. We saw that 120 years ago in the gilded age and now we are entering a new gilded age. Question: Is there economic data about this which shows that (a) estate taxes are an effective means of disrupting inherited wealth and (b) is my bias against this group warranted from an economic perspective?

Jed


Have a great weekend!


The Daily Shot provides objective and disinterested analysis and commentary regarding macroeconomic and market trends. Other than indirectly through country or sector specific exchange-traded or mutual funds, the author of the Daily Shot does not have any interest in or own any of the individual securities which may be mentioned. The Daily Shot does not provide investment advice or any recommendations regarding particular securities. Nothing in the Daily Shot should be relied upon in making an investment decision, nor considered to be a solicitation to offer or buy any securities.


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