The Daily Shot


As crude oil stabilized on Tuesday, some risk appetite returned to global markets. Both credit and equity markets rallied. Here is the Barclays HY index (ETF).
Source: barchart
Note that for those willing to take on some volatility, US HY market remains attractive at 9% yield. As discussed yesterday, an increased default rate is already priced into the market. Moreover, the media is now hyping the HY boogeyman, which should make most contrarians pay attention.
Source: CNN
Australian equity markets closed up 2.4%, driven in part by some signs that iron ore prices may be stabilizing.
Source: @DavidInglesTV
Here is the May-16 iron ore futures contract (the most active) on the Dalian Commodities Exchange in China.
Source: barchart
We've obviously seen this type of bounce before, just to be followed by further selling. In fact, in spite of the crude oil markets moving higher on Tuesday, the broad Continuous Commodity Index managed to hit another low.
Source: barchart
Related to the above, the Baltic Dry shipping index hit an all-time low. There are plenty of economic challenges ahead.
Source: @MktOutperform
Speaking of temporary rallies, oil markets were expecting a draw on US crude inventories. Instead we got an increase, which sent crude lower.
According to some estimates, crude oil inventories are expected to continue rising through mid-2016 unless OPEC reduces production. 
Source: @vexmar
In other energy news, US lawmakers agreed to lift the ban on crude oil exports which has been in place for some 4 decades. Will this have an impact on crude prices? Unlikely, since the markets already priced in this change in the law. That's why we've seen the Brent-WTI spread narrow lately.
Source: @MktOutperform
Is the massive crude oil correction already priced into the equity markets? This chart suggests they are.
Source: Deutsche Bank
And then there is US natural gas. Futures fell nearly 5% on Tuesday, hitting a 16-year low (as New Yorkers walk around in t-shirts in the middle of December). El nino? Perhaps.
Source: barchart.
Turning to China, the RMB depreciation continues. According to Bloomberg, this is the longest losing streak since 2007 and the weakest level since 2011. The PBoC is clearly trying to weaken the currency ahead of the FOMC meeting to reduce the impact of a stronger dollar.
Source: @DavidInglesTV
Here is what's going on in several other emerging markets.

1. The FT asks if Argentina's new government is preparing to devalue the currency. 
Source: @fastFT
2. Russia's economy continues to struggle as industrial production contracts more than consensus. With oil prices at current levels, especially Brent below $40/bbl, it's a very difficult road ahead.
3. Israel remains in deflation.  The central bank is unlikely to act however, remaining in a holding pattern for now.
Source: Haaretz Daily
4. The chart below shows the growth in dollar-denominated EM corporate debt (including a forecast for next year). Not a pretty picture.
Source: @Vconomics, Société Générale
Turning to the Eurozone, we have a couple of developments to cover.

1. Here is real GDP growth comparison across the Eurozone. Ireland continues to outperform.
Source: Deutsche Bank, h/t Josh
2. Finland's economy is struggling.
3. While the Eurosystem (ECB) balance sheet expansion has a while to go, the monetary base is approaching the previous peak.
Source: ECB
Source: ECB

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Back in the United States we are approaching the big event - the FOMC meeting. While it's going to be entertaining, most of what the Fed is about to do is already priced into the markets - so don't expect "shock and awe".
Source: @valuewalk
Here are some comments with regard to the rate hike.

1. While the Fed will hike the Fed Funds target range by 25bp the rate will rise by only 20bp. Fed Funds will trade at a small spread above the RRP rate (technical reasons discussed here), and the RRP rate will move up by 20bp (from 5bp now to 25bp).

2. Inflation expectations remain way too low to start a rate hike cycle. This is unlikely to deter the FOMC since they view this indicator as "transient". Nevertheless, the FOMC will telegraph an extraordinarily slow path of rate increases going forward. 
3. US monetary conditions have already tightened in anticipation of these hikes as real rates rise.
4. The markets are betting on slow growth going forward as the treasury curve flattens further.
5. Here is what the key economic indicators looked like the last time the Fed started a tightening cycle.
Source:  ‏@RBS_Economics
6. Tuesday's inflation report showed core inflation at the Fed's target, which should give the FOMC more confidence to proceed.
Moreover, the so-called "sticky" CPI (described below) continues to rise.
Markets are well positioned for this policy change - here are a couple of examples.

1. Short-term treasury yields have risen materially all the way out to 3 years.
Source :
2. Money market rates have all moved higher. Below is the 1-week LIBOR, now pricing in several days of higher overnight rates.
Source:  ‏@boes_ 
Similarly, commercial paper rates have risen in response (financial and nonfinancial CP rates are shown below).
It's going to be an interesting day.
Finally, to remind us all of the investment minefield out there, here is Third Avenue's fund.

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Turning to Food for Thought, we have 4 items this morning:

1. In which countries are pensioners most at risk of poverty?
Source: @wef
2. Since we are talking about inflation, here is what US CPI looks like going back to 1775.
Source: @WSJecon
3. Are labor problems in China about to get worse?
Source: ‏‏‏ ‏@WSJGraphics
4. The most dangerous high school sports in the United States.
Source: ‏@voxdotcom
Thanks to @NickatFP, @MattGarrett3, and for helping with research for the Daily Shot.
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