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Wed, 26th April 2017

Anirudh Sethi Report

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Archives of “April 9, 2017” Day

Confusion In Bond World, As Eurodollar Shorts Hit New Record High Over $3 Trillion

One week after we observed the biggest monthly short squeeze in 10Y TSYs in history, it was a relatively calm week in the longer-end of the Treasury curve.

According to the latest CFTC data, spec net shorts in aggregate Treasury futures was little changed from the previous week at 612K contracts in TY equivalents. While, they continued to pare net shorts in TU and TY by 18K and 14K contracts, respectively, they increased their  net shorts in FV and TN by 35K contracts and 6K contracts, respectively. Spec net shorts as share of open interest was unchanged at -5.8% over the week and was at about -2.0 standard deviations away from neutral.

While net Treasury futures shorts are now back to the lowest levels since early December 2016, traders continued to pile into the short-end betting massively on further rate hikes as Eurodollar shorts push on beyond $3 trillion: in the last week specs sold another 73K contracts in Eurodollar futures, taking their net shorts to the seventh successive week of record high of -3,129K contracts.

China’s A-shares have better shot at MSCI index

Shanghai and Shenzhen shares have a greater chance at joining a major emerging-market stock index after recent market reforms, though a smaller pool of issues under consideration means entrance will do less than investors and China’s government would like.

MSCI of the U.S. is soliciting institutional investors’ input on whether to include A-shares, or yuan-denominated shares listed on the Chinese mainland, in its Emerging Markets Index. Citigroup gives China’s bid a 51% chance of success, in light of recent reforms.

 These odds are a good deal better than when the question was first considered in 2014. A-shares have been kept out of the mix three years running amid concerns that China’s capital markets are insufficiently open.

The so-called Qualified Foreign Institutional Investor, or QFII, scheme was one key factor. This scheme was long foreign institutions’ only option for buying A-shares. Each entity’s dealings were subject to strict quotas, and the value of remittances was capped at 20% of net assets each month. MSCI naturally refused to include shares in its index that could not be freely bought and sold, and Beijing was slow to change the system to address those concerns.

The index operator has also looked askance at Chinese listed companies’ ability to halt trading of their shares at will — an option that, at one point, roughly 50% of companies had taken. A need for prior approval to create products incorporating A-shares also left MSCI leery.

Emerging Markets :An update

  • Reserve Bank of India surprised markets with the start of the tightening cycle.
  • The Czech National Bank (CNB) ended the EUR/CZK floor.
  • Israeli central bank said it won’t hike rates until Q2 2018.
  • Both S&P and Fitch cut South Africa’s rating one notch to sub-investment grade BB+.
  • Moody’s put South Africa’s Baa2 rating on review for a downgrade
  • S&P upgraded Argentina one notch to B with stable outlook.
  • Brazil’s government will water down its pension reform plan
  • Brazil’s central bank corrected some errors in its inflation report.

In the EM equity space as measured by MSCI, the Philippines (+3.8%), Chile (+3.5%), and Poland (+3.4%) have outperformed this week, while Korea (-0.7%), Turkey (-0.6%), and Peru (-0.5%) have underperformed.  To put this in better context, MSCI EM rose 0.3% this week while MSCI DM fell -0.5%. 

In the EM local currency bond space, Bulgaria (10-year yield -11 bp), Chile (-6 bp), and South Africa (-6 bp) have outperformed this week, while India (10-year yield +17 bp), Turkey (+12 bp), and Indonesia (+10 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 6 bp to 2.33%. 
In the EM FX space, CZK (+1.7% vs. EUR), INR (+0.9% vs. USD), and EGP (+0.7% vs. USD) have outperformed this week, while ZAR (-3.0% vs. USD), TRY (-2.7% vs. USD), and RUB (-1.6% vs. USD) have underperformed.

Reserve Bank of India surprised markets with the start of the tightening cycle.  It hiked the reverse repo rate 25 bp to 6.0% but left the repo rate steady at 6.25%.  The decision was unanimous, and we expect further tightening as the year progresses.

North Korea Calls Syria Missile Strike by US ‘Unforgivable’

North Korea’s Foreign Ministry has called Saturday’s missile strikes on a Syrian airfield by the US “an unforgivable act of aggression,” and says in light of this most recent act of US aggression, Pyongyang’s decision to develop nuclear weapons is clearly “the right choice a million times over.”

According to official North Korean news agency KCNA, a North Korean Foreign Ministry spokesperson said, “The U.S. missile attack against Syria is a clear and unforgivable act of aggression against a sovereign state and we strongly condemn this.”

Xi Jinping’s goal eludes him in the US

The primary goal of Chinese President Xi Jinping in the first face-to-face meeting with his U.S. counterpart, Donald Trump, was to seek a new beginning for his “major powers” initiative. But he got off to a rather rocky start; the summit was overshadowed by a series of unexpected events.

On Thursday night, Xi and his wife arrived at Trump’s Mar-a-Lago resort in an already summery Florida, where daytime temperatures reach 30 C. During the dinner, the couple enjoyed listening to Trump’s granddaughters singing Chinese folk songs and reciting poems from China’s Tang dynasty.

 As they were enjoying the entertainment, U.S. forces were bombing Syria. It was only toward the end of dinner that Trump told Xi about the operation.

Xi must have felt quite awkward. He might have felt completely taken in by Trump. Xi was right next to the commander in chief who had just ordered a bombing campaign in a politically sensitive region of the world, happily smiling and talking without knowing anything about the assault.

The timing of the missile attack was carefully calibrated. Just before meeting with Xi, Trump suggested the U.S. might engage in unilateral military action against North Korea, which had launched a ballistic missile days before the U.S.-China summit. The bombing of Syria — and the campaign’s timing — was apparently intended to pressure China, which is reluctant to cooperate with the U.S. in dissuading Pyongyang from pursuing missile and nuclear weapons programs.

Citi: Central Banks “Took Over” Markets In 2009; In December The “Unwind” Begins

Citigroup’s crack trio of credit analysts, Matt King, Stephen Antczak, and Hans Lorenzen, best known for their relentless, Austrian, at times “Zero Hedge-esque” attacks on the Fed, and persistent accusations central banks distort markets, all summarized best in the following Citi chart…

… have come out of hibernation, to dicuss what comes next for various asset classes in the context of the upcoming paradigm shift in central bank posture.

In a note released by the group’s credit team on March 27, Lorenzen writes that credit’s “infatuation with equities is coming to an end.”

 What do credit traders look at when they mark their books? Well, these days it is fair to say that they have more than one eye on the equity market.

Understandable: after all, as the FOMC Minutes revealed last week, even the Fed now openly admits its policy is directly in response to stock prices.

As the credit economist points out, “statistically, over the last couple of years both markets have been influencing (“Granger causing”) each other. But considering the relative size, depth and liquidity of (not to mention the resources dedicated to) the equity market, we’d argue that more often than not, the asset class taking the passenger seat is credit. Yet the relationship was not always so cosy.  Over the long run, the correlation in recent years is actually unusual. In the two decades before the Great Financial Crisis, three-month correlations between US credit returns and the S&P 500 returns tended to oscillate sharply and only barely managed to stay positive over the long run (Figure 3).”

‘Out Of This World’ – NASA’s Budget Is Without Parallel

The budget afforded NASA is far and away the largest on earth…

Infographic: NASA's Budget is Without Parallel | Statista

You will find more statistics at Statista

With 19 billion dollars to play with each year, Statista’s Martin Armstrong notes the U.S. space agency can outspend the ESA, Rocosmos, CNSA, ISRO, and JAXA combined. It is important to note however, that the figure for CNSA is an estimate due to the lack of comprehensive information from the Chinese government.

 

US Sends Aircraft Carrier Toward North Korea “In Response to Recent Provocations”

One day after NBC reported that the National Security Council had presented Trump with three options vis-a-vis North Korea, namely i) put American nukes in South Korea , ii) kill Kim Jong-un or iii) use the CIA to infiltrate North Korea to sabotage or take out key infrastructure, a US carrier group has departed Singapore and is headed for North Korea.

According to Reuters, a U.S. Navy strike group will be moving toward the western Pacific Ocean near the Korean peninsula, a U.S. official told Reuters on Saturday, as concerns grow about North Korea’s advancing weapons program.  The strike group, called Carl Vinson, includes an aircraft carrier and will make its way from Singapore toward the Korean peninsula.

The move of the USS Carl Vinson “is in response to recent North Korean provocations”, an official told CNN. “We feel the increased presence is necessary,” the official said, citing North Korea’s worrisome behavior.”

Harry Harris, the commander of U.S. Pacific Command, directed the USS Carl Vinson strike group to sail north to the Western Pacific after departing Singapore on Saturday, Pacific Command announced.

The Vinson strike group will operate in the Western Pacific rather than executing previously planned port visits to Australia, Pacific Command said. The group will remain under the operational control of the Third Fleet.

This year North Korean officials, including leader Kim Jong Un, have repeatedly indicated an intercontinental ballistic missile test or something similar could be coming, possibly as soon as April 15, the 105th birthday of North Korea’s founding president and celebrated annually as “the Day of the Sun.”