The Daily Shot


We begin with the credit markets where extreme weakness in oil, the impending rate hikes in the US and increased risk aversion are all putting severe pressure on valuations. Liquidity is worsening and rumors/stories of forced deleveraging/liquidation abound.
Source: MarketWatch
HY bonds gapped 2% lower on Friday (after being even lower intraday) with much of the volume concentrated in index trading. In fact HY ETFs saw the largest weekly volume on record.
Source: barchart
Of course the accelerating fund outflows over the previous week did not help.
Source: BAML
Leveraged loans gapped lower as well in what looked like indiscriminate selling. Once again there are rumors of total returns swap (TRS) margin calls (TRS is one of the techniques used to leverage loan portfolios).
Source: barchart
Even investment grade spreads widened sharply, with IG CDX now at 2013 levels.
Source: @boes_
To some it is no longer just about energy or heightened risk aversion. A number of analysts have been pointing out that we are approaching the period of the cycle when corporate defaults spike. Here is the percentage of North American firms losing money - a metric that tends to be a leading indicator for defaults.
Source: Credit Suisse
The relatively easy conditions in corporate credit we've enjoyed over the past 3 years seem to be ending. 
h/t Claude
The spike in risk aversion was also evident in the equity vol markets as the VIX (implied vol index) curve went into backwardation (inverted).
Source: @SoberLook
This next chart compares the 3-month implied volatility index with VIX - which is roughly based on a 1-month S&P500 vol.
The situation in oil markets turned ugly on Friday as Brent crude gave up some 5%, and is now trading about a dollar above the 2008 low. Here is the 10-year chart.
Source: barchart
Crude oil implied vols shot up, though remain below the September highs.
US oil rig count decline quickened last week, but that didn't seem to help stabilize prices.
US natural gas plummeted in Sunday night trading, dropping almost 4%. Here is the 1-week and the 9-month chart. Amazing!
Source: barchart
Source: barchart
Shares of vulnerable O&G companies are moving to new lows. Here is an example: Chesapeake Energy, the second largest energy HY issuer in the US.
Are these developments deflationary? Below is a chart that shows a significant divergence between crude oil and inflation expectations. Will we see inflation expectations move lower this week?
Source: Credit Suisse
The Canadian dollar took a beating on this dislocation in the energy markets. It was trading at 1.37 to the dollar - the weakest in over a decade. 
A number of other commodities remain under pressure globally. Here are the iron ore futures on the Singapore Exchange.
Source: barchart
The broad commodity indices were lower as well, hitting multi-year lows. Below is the Continuous Commodity Index and the CRB index.
Source: barchart
By the way, the Australian dollar rally (discussed last week) is taking the currency in the opposite direction from commodities. Here is the divergence between the Aussie dollar and a metals index. Something will have to give here.
Source: UBS

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Turning to emerging markets, there was red across a number of vulnerable nations.

1. EM equities underperformance worsened.
2. The Russian ruble traded to RUB 70 to the dollar in response to the energy situation.
3. The Mexican peso and the Colombian peso hit record lows.
4. The Turkish lira sold off by 2% on government's new economic program, as investors raised concerns about commitment to fiscal discipline and structural reforms.
5. And then there is South Africa where the situation remains fluid. Bond yields and sovereign CDS spreads continued to move higher.
Source: Deutsche Bank
The South African rand was sharply weaker again on Friday. However on Sunday we had some bizarre news from Johannesburg.  
Source: ABC News
That's right, yet another finance minister. It seems that the markets pressured Zuma to put someone more credible in that role. Perhaps.
ABC: - On Sunday, President Jacob Zuma's office announced that recently appointed finance minister David van Rooyen will be replaced by Pravin Gordhan, who previously served as finance minister from 2009 to 2014.
The currency markets responded positively, with the rand rallying over 3%. Let's see how long this optimism lasts ...
Turning to China the onshore/offshore RMB spread has widened sharply - again. Some are suggesting that the PBoC will be in the offshore market shortly, trying to bring these two in line.
Source: barchart
In other China-related developments, the local government bond issuance has jumped this year as Beijing attempts to convert off-balance-sheet financing vehicles into an active municipal bond market. This may be the next area of credit growth in China. 
Source: UBS
Related to the above, China's onshore bond issuance has spiked in 2015.
Source: @markets
Now let's look at a few developments in the equity markets.

1. The chart below shows US small cap relative performance.
Source: Stockcharts
Why have the smaller US firms underperformed so much? One explanation is that these firms are less prepared for rising rates in the United States. Small cap leverage is higher and interest coverage weaker.
Source: UBS
2. According to Bloomberg, "Barclays CEO Jes Staley has extended a freeze on hiring new staff indefinitely". Is the financial sector facing challenges again?
Source: @business
3. US retailers are struggling. Here is the relative performance of the S&P Retail Index vs. S&P500 (total return).
As an example, below is ​Men's Wearhouse whose acquisition of rival Jos. A. Bank isn't going so well. 
Source: Google
It's important to point out that while a great deal of the data discussed above looks terrible, globally it's not all doom and gloom. For example, the latest industrial production reports from three economies all surprised to the upside. It tells us that while global growth remains weak, it seems to be stable.

1. China:
2. India: 
3. Italy:
And to put everyone in a great mood, here is bitcoin, remaining completely decoupled from global markets.
Finally, a note from Proshares is preparing investors for derivatives regulation with respect to funds and ETFs. Note that leveraged ETFs (for example short market ETFs or 2x, 3x ETFs) often use total return swaps to synthetically produce targeted returns based on an index. It's unclear how the whole thing will play out. 
Source: ProShares

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

1. It looks as though the UK housing shortage will persist for some time.
Source: HSBC
2. Poland's spectacular geographically-based electoral divide.
Source:  ‏via @GeoCurrentsLive, h/t Julian
3. China vs. US consumer discretionary expenditures across major categories.
Source: ‏‏‏@wef (
4. The National Retail Federation is predicting another increase in holiday spending in the US (according to Bloomberg).
Source: ‏@business
Here is what Americans will spend it on (shown over time).
Source: ‏@business,
Thanks to @NickatFP, @MattGarrett3, and for helping with research for the Daily Shot.
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