Let's begin with a number of key developments in the energy markets. Here we go:
1. US production, while remaining near record levels, is showing signs of strain.
Bloomberg ran a story on Wednesday pointing to some Bakken (North Dakota) producers who can survive at $30/bbl. While that's impressive, it's by no means universal. With WTI crude below $44/bbl, these production levels are unsustainable.
2. No worries - there will be plenty of supply from elsewhere. Iraq's production hit record levels as Iran prepares to boost output.
Source: @markets
3. In fact according to IEA, the oil glut will persist through 2016 before the non-OPEC supply begins to dwindle.This of course is not soon enough for some leveraged energy firms.
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| Source: @BloombergNRG |
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| 4. US gasoline usage is hitting record levels as Americans hit the road. |
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| 5. As a result of the above, US crude oil refinery inputs also touched records in recent weeks. With crack spreads remaining elevated, it's a good business to be in these days. |
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| Source: @SoberLook |
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| 6. The curve is quite steep again and the "cash & carry" trade is looking interesting. Storage seems to be expensive (since there is already so much crude in storage), but at some point this works. Again, the trade is A) Borrow money. B) Buy spot crude oil and store it. C) Simultaneously sell it forward in the futures markets (which is much higher than spot). If your financing costs plus storage costs are below the slope of the curve (contango), it's a profitable trade. |
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| Source: Bloomberg; thanks Mike! |
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| 7. At current oil price levels the governments of many OPEC nations are running large deficits. |
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| Source: @bySamRo Business Insider, Macquarie |
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| In fact, some concerns have already been raised about UAE, where the short-term interbank rates (LIBOR-equivalent) have jumped. The government is forced to introduce sales and corporation taxes to deal with the situation. |
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| Source: @vexmark |
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| 8. In other energy markets, here is the latest situation with Japan's nuclear reactors. |
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| Uranium prices have stabilized as more capacity comes online. |
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| Source: barchart |
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Turning to other commodities, here are a few developments:
1. Remember when I recently discussed the short position building up in speculative accounts? Well, gold prices bounced on some short-covering related to recent events with the . Fundamentals are still poor for gold, but the speculative part of the market remains short and vulnerable to a short-squeeze.
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| Source: barchart |
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| 2. China is flooding the global markets with aluminum as exports set new record. |
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Source: @pdacosta
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| 3. US farmers can't catch a break, as USDA's latest crop report raised production forecasts for and . Corn futures dropped some 5%. |
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| Source: barchart |
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| Turning to China, the devaluation story remains in the headlines. China's government intervened in the market yesterday as the yuan sell-off became too acute for their taste. The nation's approach to this process is nothing short of bizarre. Here is a great summary by the FT. |
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| Source: barchart |
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| It is clear why China needs this devaluation as the economy continues to struggle. The nation can't afford to tag along with the strengthening dollar. Industrial production growth slowed more than expected, putting into question the sustainability of the 7% GDP growth. |
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| Source: Investing.com |
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| The reaction to the yuan devaluation has been ugly for a number of markets. The took another hit (although we are probably due for a bounce). European auto makers and luxury goods groups with exposure to China were under pressure. |
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| Source: @markets |
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| Source: @fastFT |
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| The "risk-off" sentiment has once again forced the carry trade unwind, which (as usual) sent the higher. More on carry trades later. |
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| Source: Investing.com |
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| At the same time, the risky asset sellers moved their cash into Bunds, sending the yield deeper into negative territory (record low). |
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| Source: @FastFT |
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| On the economic front, the Eurozone disappointed. This tells us that the currency bloc' recovery remains uneven. |
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| Source: Investing.com |
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| The latest data out of the UK suggests that the post-election housing market continues to strengthen. |
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| Source: Investing.com |
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| As predicted here, jump over the previous two months was transient (related to some food items). More RBI easing is coming. This is now even more likely as China devalues and India needs to stay competitive. |
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| Source: Investing.com |
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| The has indeed sold off in reaction to the the yuan devaluation (chart shows USD rallying against INR). |
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| Source: barchart |
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| Ukraine remains on the brink of default as the deadline approaches. Here is the outcome tree. |
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| Source: @markets |
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| Speaking of "Frontier" markets, an ugly situation is developing in Ghana. The country's inflation rate hit 18% as a result of its massive multi-year currency devaluation. The central bank's rate hiking efforts have been ineffective thus far. |
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| Now let's look at a couple of trends in US equity markets.
1. Cheap crude oil and more Americans hitting the road has sent tire makers' margins to new highs.
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| Source: @JavierBlas2 |
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| 2. With Alibaba (NYSE:)'s quarterly sales at slowest pace in 3 years and transaction volumes below expectations, we see a massive price divergence between Alibaba and Amazon (NASDAQ:). |
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| Source:Ycharts |
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| In fact according to Bloomberg, Amazon's market cap is once again larger than Alibaba's. |
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| In US corporate credit markets we continue to see worsening sentiment. Investors are exiting energy, mining, and related industries. The selloff is across the "quality" spectrum.
1. Investment grade spreads continue to widen.
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| Source: @MktOutperform |
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| 2. Distressed bond prices are collapsing after some hefty gains in recent years. |
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| Source: @MktOutperform |
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| 3. Sub-investment grade corporate credit is under pressure - with both HY bonds and bank loans taking a hit. Some of these assets are starting to look interesting for those who can ride out the volatility. |
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| Source: Ycharts |
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| As discussed yesterday, the probability of a 2015 rate hike remains high but has diminished somewhat as a result of the dollar strengthening against the yuan. |
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| Source: @markets |
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| Finally, the markets currently expect US short term rates to max out at 3% in the long run. The expectation was 5% in 2013. Markets are pricing in what some refer to as "secular stagnation". |
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| Source: GS |
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| Turning to Food for Thought, we have 5 items this morning:
1. The US is losing out to European pork producers when selling to China as a result of muscle enhancing drugs which the bulk of US pigs are injected with.
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| Source: @sobata416 |
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| 2. According to Bloomberg, US "demand for daycare will probably continue to outstrip supply, driving up costs". |
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| Source: @business |
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| 3. Americans are unhappy with the US Congress. |
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| Source: @GallupNews |
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| 4. Global youth unemployment data in one chart. |
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| Source: @OECD_Social |
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5. According to Gallup, "In the U.S., 65% favor path to citizenship for illegal immigrants..."
Disclosure: The Daily Shot is sponsored by Fitch Solutions
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