The Daily Shot

July 17th, 2015


I'd like to begin by welcoming all the new Daily Shot readers from J.M.Finn, Mercer, Deutsche Bank, and BAML. 
Once again, let's take a look at the latest on the situation with Greece:

1. After getting comfortable that the Eurogroup will support Greece, Mario Draghi announced that the ECB will resume increasing the ELA loan balance for Greek banks. Capital controls will likely have to be in place for some time but banks could open next week.

2. Draghi also surprised some by throwing his support behind the IMF's push for some debt forgiveness for Greece.

3.  The Eurogroup agreed to release a €7bn "bridging" loan to Greece. One of the drivers here is to make sure Greece does not default to the ECB (due next week). The idea of the ECB having to take a write-down really spooks the Eurozone leadership.

4. The €7bn will come out of EU's EFSM and the UK wanted to make sure it's not taking any Greek exposure. The agreement with the UK now requires the Eurozone to cover UK's losses.

Risk assets continued to rally on the news. Greek bond yields declined further, with the 2-year falling below 25%.
Similarly, the CDS spreads contracted. Problem solved...
Source: @MktOutperform
One market that continues to surprise some is the euro, which fell sharply on the positive news from Greece. As I discussed before, the euro is a great base currency for carry trades, which are popular in a "risk-on" environment. Short euro, long sterling is one such trade that takes advantage of the material short-term rate differential. That's why we see euro-sterling decline sharply after the Greek situation was supposedly "stabilized".
Source: barchart
It's not surprising the ECB supports the IMF's (and to some extent the US) position that Greek debt is not sustainable and lenders must be more realistic. Shown below is the latest debt-to-GDP projection.
Source: @pdacosta
Here is one way to describe the situation.
Source: @SonyKapoor, @NickatFP
The chart below seems to suggest that European nations outside the euro did better. Some of this is due to the fact that a number of nations that joined the euro suddenly found access to a great deal of cheap euro-denominated financing (including cheap mortgages, municipal debt, etc.).
Source: @voxdotcom 
OK, enough of Greece for now. Market's other favorite topic, China, also grabbed some headlines.
Source: CNN
China GDP trackers (models that take into account items such as rail traffic and electricity use) were pointing to a lower GDP growth reading than what the government reported. While some "liberties" with economic figures were probably taken, a more likely explanation is that China's stratospheric equity market rally and the accompanying unprecedented trading volume temporarily boosted economic activity in the financial sector (massive brokerage fees, etc.). This is likely to be reversed shortly.
Source: @TomOrlik 
Latin America continues to struggle with the end of the commodities supercycle.

1. Here is broad commodity index and ...
Source: barchart
2. ... growth in GDP & terms of trade (an indicator of export activity) for Latin America.
Canadians are wondering why exports (excluding natural resources) are not expanding in spite of weaker Canadian dollar. Perhaps Mexico is part of the answer. Manufacturing stuff in Mexico for sales in the US and elsewhere has become really cheap.
Now I'd like to look a whole slew of interesting developments in the equity markets as the Greece situation "settles down". Here we go.

1. Biotechs outperformance has been spectacular.
2. Here is a long-term chart of the Nasdaq-100 Index.
Source: barchart
And on a much shorter time frame, Google is up 11% in after hours trading on strong Q2.
Source: barchart
Oh, yes, almost forgot. Netflix market cap is now larger than GM.
Source: @EricGPlatt
3. We've had a massive rally in German shares over the past few days. Elsewhere in EU the situation is similar. Nikkei 225 is approaching the year's high again.
4. VIX dropped below 12 again. This was the largest 5-day decline in VIX on record.
Source: @SoberLook
5. Regional banks outperformed the banking sector over the past 5 years due to regulatory pressures on larger banks.
6. Shares of gold miners are under severe pressure. Some point to the fact that relative to gold price these shares are cheap. Perhaps.
7. Upstream energy shares are under pressure as crude below $52/bbl will do real damage to oil production and exploration firms.
8. Now let's revisit the situation with coal companies.

Here is the reality the coal industry is dealing with.
As a result, we had a massive decline in coal prices.
Source: barchart
Shares of US coal companies consequently got decimated.
And now we have this.
Source: WSJ
And this.
Source: WSJ
More to follow. There is going to be a great deal of money to be made restructuring and financing these firms.
Finally we have the latest poll of economists on the timing of Fed's first rate hike. The answer is overwhelmingly "September".
Source: @pdacosta
Now some Food for Thought - 5 items:

1. FOX News 2016 Republican Presidential Nomination Poll. No comment.
Source:  ‏@SoberLook
By the way, since we are on the topic, here is who supports Donald Trump.
Source: @FactTank
2. Wow. Map of WW2 shipwrecks.
Source: @Amazing_Maps
3. Election apathy: according to the US Census Bureau, "congressional voting turnout is at lowest mark since 1978."
Source:  ‏ ‏@uscensusbureau
4. How Americans and the Japanese view each other.
Source:  ‏@jensmanuel 
Note that last item above is very important given Japan's recent changes with respect to defense.
Source:  ‏Belfast Telegraph
5. The "job approval" of the US Supreme Court has become extremely polarized. 
Source:  ‏@GallupNews 
The next issue of the Daily Shot will be out July 20th. Have a great weekend.
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