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The Daily Shot

January 28th, 2015


Let's start with the unfolding situation in Greece, where the new finance minister Yanis Varoufakis has been calling the austerity program imposed by the troika a "“fiscal waterboarding". A vivid description indeed. 

Greek government bond yields spiked on Syriza's escalating rhetoric as well as on the right-wing anti-austerity party (Independent Greeks) becoming Syriza's new coalition partner. Think about it - the only thing the two parties have in common is their hatred for the Eurozone and the fiscal pain that was imposed on Greece. The battle lines have been drawn.
The Greek government bond yield curve has become more inverted as markets price in principal reductions that are likely to apply evenly across the curve (which is what typically causes such inversion).
It is expected that if such haircuts are applied, they would hit both official and unofficial accounts (including bonds held by the ECB). Debt forgiveness would also cut principal on the government bonds held by Greek banks - who are some of the largest holders. That's why shares of Greek banks got decimated today. New bank bailouts will be required if there is any hope for sustained credit availability to the private sector. For now most credit activity will come to a grinding halt - and with it any hopes for nearterm economic recovery.
Source: @WSJGraphics
The overall equity market fell over 9% today as government officials halt privatization and the rhetoric escalates. 
Greece also extended an olive branch to Russia. Both nations apparently feel they've been mistreated by the EU. And Putin now has a new ally within the Eurozone.
Source: Reuters
The newly elected government may ultimately get its debt forgiveness. But in the process the damage done to the nation's private sector will be severe - just as Greece begins to come out of a deep depression that rivals some of the worst downturns in global history.
Deflationary risks remain a problem in the Eurozone, particularly now that the uncertainty around Greece worsens. Today's report from Germany showed an ongoing and accelerating import price declines. In effect Germany is "importing" disinflation.
Source: @SoberLook
Since we are on the topic of the Eurozone, it is worth pointing out that the ECB's actions last summer did have a small but positive effect on consumer credit markets - especially in the periphery. RMBS (residential mortgage securities) that qualified for the ABS purchase program saw a substantial reduction in spread. That should be supportive for the consumer.
Source: @Eurofaultlines
Global yields continue to fall as investors focused on relative value. One of the places to look of course is the US where some see the 30yr treasury as relatively cheap. And as the stock market sold off (due to the Fed staying with status quo), treasury yields went with it - with the 30yr yield hitting a new record low. 
Investors also went after other (relatively) high yielding sovereign bonds. The 10-year New Zealand, Australia, Canada, and South Korea government bond yields hit record lows.
Speaking of New Zealand, the central bank governor Graeme Wheeler hinted that with commodity prices falling, the next rate move could potentially be lower. 
The reaction in the currency markets was swift, as the New Zealand dollar (NZD) sold off sharply. 
Source: barchart
Thus we could see yet another central bank joining the BoJ, ECB, BoC, RBI (India), SNB, PBoC, Riksbank, etc. in policy easing. Wheeler has another reason to talk NZD lower. The nation's trade deficit has worsened (chart below)and a weaker currency could help. Why not join the currency war?
Source: Reuters
Energy markets remain under pressure. The US oil markets in particular are now oversupplied, as inventories reach record levels.
Source: Reuters
Looking back on the US shale revolution, it's easy to see how the oil production cost curve had changed - once you get above $80-$85/bbl, production spikes. Which tells me that for some time to come, that will be the cap on oil prices.
Source: Business Insider: @themoneygame
Related to the above, Russian sovereign CDS spread hit a new high in the last couple of days. Ugly.
Source: Barclays
As discussed before, fuel price declines are not limited to oil. China's coal consumption fell for the first time since 2000. That is pressuring coal prices in Asia, as Indonesian coal producers go broke.
Source: @sobata416
Similarly in the US, with cheap abundant natural gas, coal prices keep falling. Below is the March 2015 Appalachian coal futures contract.
Switching topics to global M&A activity, the US was back at pre-crisis levels in 2014. Of course it's not clear if this will be repeated in 2015, given the increased market volatility. Europe's M&A however is still materially below the pre-crisis levels.
Source: @Eurofaultlines
Some evidence is emerging that the wage stagnation in the US may be easing. Principal Global Investors sees a stronger wage pickup than what was reported in the US Census data. I'll start taking this more seriously when I see it from other sources.
Source: @NickTimiraos 
Finally some food for thought - 3 items:

1. Here is the Fed "Yammering" Index - number of words per FOMC statement. It seems that it rose with QE (particularly taper) and is now starting to decline as the Fed stays with status quo.
Source: @WSJecon
2. New homes in the US have been quite large - in part because those who can only afford a smaller home have a tougher time getting a mortgage. This is a bit dated but here is a comparison to home sizes in the 1950s.Take a look at space per person.
Source: @conradhackett 
3. Apparently patients perform better when they believe the medications they are taking are more sophisticated - based on the perceived cost. A $100 per dose med was less effective than the one costing $1,500 - even though each was a placebo.
Source: @HedgeLy
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