week in review

This week witnessed the effects of massive losses of Deutsche Bank’s and Commerzbank’s shares and OPEC deal about first oil output cut in eight years. Deutsche Bank’s share price fell below the €10 mark for the first time in around 30 years.  After U.S. wanted Deutsche Bank to pay $14 billion over toxic mortgages, Deutsche Bank faced financial crisis again and refused to pay US penalty. This demand from US hits the markets so hard. We shouldn’t forget that Bank of America had agreed to pay a record $16.7bn in 2014 to US authorities for selling bad mortgage loans that helped start the 2008 financial crisis. On the other side, Deutsche Bank’s CEO has repeatedly said that there is no need for government support because the bank has strong fundamentals.

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In addition to Deutsche Bank, Germany’s second-biggest bank, Commerzbank, announced plans to cut 10000 jobs and after that,  it has seen its shares fall  %4…

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When I look at the global capital index via Bloomberg, Deutsche Bank’s leverage ratio lags than its peers and this means that the bank is more indebted than the industry average…

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                                                                                 STOCKS    

The German DAX moved lower and global contagion effect pushed the Europe into negative territory. Almost all stocks have been affected negatively by European Bank’s loan flows problem. In the end, the Dow Jones Industrial Average, the S&P 500 Index, the Nasdaq Composite,the Japan Nikkei 225, the FTSE 100 and the Dow 30 index lost their values by hitting Deutsche Bank’s contagion fear and record lower share prices this week. They rebounded little as OPEC cuts crude output but after that they are getting lower again. Fear versus positivity..

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The chart above, of credit default swap prices, shows the contagion effect in play…

Graph Source: http://investorplace.com/2016/09/stock-market-today-nyse-dow-jones-industrial-average-investing-news-fed-deutsche-bank/#.V-6cQiiLRhG

CRUDE OIL 

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Crude oil went up from 44.77 (27/092016) to 48.12 on friday after OPEC deal to cut production. The winners will be the oil production countries with deficits, of course. I guess that we will see the 50-60$ oil at the end of the 2016 and I expect the 60-70$ oil or maybe more agressive price in 2017. Moreover, It seems that oil prices will change the global balance in future. This time, Iran is on the stage and Russia-Saudi cooperation will change the way look at the oil prices. On the other hand, this week, US crude inventories decrease again and this helps to increase the oil prices,too.

         Reminder: World Crude Oil Production by Selected Countries via EIA report

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You can reach the report here: http://www.eia.gov/totalenergy/data/monthly/pdf/mer.pdf

     US CRUDE INVENTORIES 

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and Italy….

Increasing concerns about coming referendum on constitutional reforms caused the CDS (Credit Default Swap) spreads rise in Italy and this means that the risk is increasing about italian banks’ creditworthiness. Investors are worrying about European Banks future in these days.

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Will Deutsche Bank collapse and take down the European banking system with it?

Hope not…

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week in review

This week witnessed the effects of unchanged interest rate decisions by both US Federal Reserve (FED) and Bank of Japan (BoJ). They both kept the interest rates steady.

Chair Yellen highlighted that they chose not to raise rates mostly because of continued labor market slack and low inflation. She emphasized the weakness in investment spending extends beyond oil sector  and high commercial real estate valuations.

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Source: FEDERAL RESERVE BANK http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20160921.pdf

The charts above show actual values and projections for three economic variables. The last chart is based on policymakers’ assessments of appropriate monetary policy, which, by definition, is the future path of policy that each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her interpretation of the Federal Reserve’s dual objectives of maximum employment and stable prices.

Yellen kept policy rate unchanged but she added that there are risks in waiting too long to hike. Many economists don’t expect the fed rate hike in 2016 or expect maybe at least one rate hike before end of 2016 and some of them show the reason behind that there will be the political election risk for US. I think that Fed don’t put emphasis too much on political elections. They will look at and focus on the oil prices move effects and commercial real estate values more than other variables. After Fed’s inaction, stocks and US dollar rally and Nasdaq composite hits new all time high.

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The Bank of Japan kept its interest rate unchanged at negative 0.1% and said it would now focus on “yield curve control” by continuing the purchase of Japanese government bond yields until the 10-year bond yield is kept “at around zero percent”. In other words, the BoJ has indicated that they plan to control the yield curve going ahead with no change interest rate.

After BoJ’s inaction with yield curve control, Japan 1o year yields rise above zero for the first time since March and yield curves are going to be steeper.

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The markets initially reacted positively, and Japan’s stocks rised sharply. This graph below shows that steeper yield curves have not been negative for Japanese stocks. Therefore, this positivity has been expected.

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Graph Source:

http://www.benzinga.com/analyst-ratings/analyst-color/16/09/8457449/data-show-steeper-yield-curves-have-not-been-negative-fo

This week, OECD published the global economic outlook report and highlights the number of trade restrictions that has risen sharply since 2012. OECD warns weak trade and financial distortions damage global growth prospects.

Here are the OECD important key messages for global economy;

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SOURCE: OECD

You can reach the full report here : https://www.oecd.org/eco/outlook/economic-outlook/

Overburned monetary policy is getting serious problem for the global economy.

and Italy …

Italy is facing a banking crisis in recent years. On tuesday, Banca Monte dei Paschi di Siena’s (MPS) emergency rescue plan hits its share and bond prices as fears over the feasibility. Not only Italy’s banking sector is in trouble but also Italy still has huge government debt and high unemployment in spite of jobsact reforms.

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After Greece, Italy has the next highest debt to GDP ratio in the euro area followed closely by Portugal.

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Both central bank meetings (Bank of Japan and Federal Reserve Bank) are scheduled for Tuesday-Wednesday.

GOLD – OIL – DOLLAR INDEX SPOT (DXY) BEFORE FED AND BOJ DECISIONS/MEETINGS 

There is strong positive correlation between Gold and Oil in which both variables move in tandem this year (2016) while there is strong inverse relationship between Gold and US Dollar Index (DXY) & Oil and US Dollar Index (DXY).

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China matters !

Today, Bank for International Settlements (BIS) warns China bank risk crisis within 3 years. Data shows that Credit-to-GDP ‘gap’ in China  is the highest compare to all other nations in BIS research.This will cause the investors to panic about their stocks  because China has high corporate debt problem what causes the economy more vulnerable to volatility in asset prices and China has power to affect all markets.

The credit-to-GDP gap captures the build-up of excessive credit in a reduced-form fashion. It is defined as the difference between the credit-to-GDP ratio and its long-run trend, and it has been found to be a useful early warning indicator of financial crises.

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Source: BIS (Bank of International Settlements) http://www.bis.org/bcbs/publ/d339.pdf

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Source: BIS September 2016 (Bank for International Settlement): you can find all data information from this link : https://www.bis.org/statistics/c_gaps.htm

You can see the ‘China Credit to GDP gap’ graph clearly from Bloomberg. It’s getting worse and increased. China has over-capacity problem amd this caused the debt costs rise and limit the investment opportunities. China’s government spends more money than it takes in.

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On the other side, China’s retail sales and industrial production grow unexpectedly in August. Therefore, industrial profits and investments were up in August and continue increasing.

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Source: DeutcheBank

A series of stimulus efforts have improved the China’s cyclical situation this year and growth is picking up in 2016. When I look at the CDS (Credit Default Swap) speads which measure the risk of default on sovereign debt, China has low risk on his default compare to other major emerging countries, such as Russia, Mexico, South Africa and Brazil. China’s government bond yields are still attractive for investors and inflation expectations are positive today.

I think that the historical experiences really don’t matter for Today China. China is China.

week in review

This week witnessed the effects of inaction ECB decision (Draghi keeps rates unchanged), stock market volatility, weaker US data, oil prices rally and uncertainty of FED rate hike.  These kind of effects  caused yield curves steeper in last 10 days.

Therefore, US, German and Japanese 2-10 year government bond yield curves are getting steeper in last 10 days. In other words, the gap between two-year and 10-year government bond yields has widened recently. A steepening yield curve is traditionally thought to signal an improving economy. The steep yield curve is an indicator of stronger economic activity and rising inflation expectations in the long term. In normal conditions, this steeper yield curves should be attractive and positive for the Fed decision about rate hike, but you need to see the big picture here. Fed is not looking at only these yields, but  also they examine the historic relationship between bond yields, major stocks, inflation expectations, oil prices move and US dollar index. In addition, developments of China, Germany and Japan also affect the fed decision.

STEEP YIELD CURVE 

A change in the yield curve where the spread between the yield on a long-term and short-term. Also known as the term structure of interest rates, yield curves are typically used depict the relationship between interest rates and the time to maturity of a debt security such as a bond.  The shape of the curve provides the analyst-investor with insights into the future expectations for interest rates as well as possible increases or decreases in macroeconomic activity.

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Graph Source : http://uk.reuters.com/article/us-global-bonds-curves-idUSKCN11L1W6

On the other side, On September 6, the Dow-Jones Industrial Average and the S&P 500 was around its historic high, and the NASDAQ index set a new historic high the day after. At the same time, volatility revival both in emerging  and developed market currency.

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Interesting data from: http://www.benzinga.com/analyst-ratings/analyst-color/16/09/8457449/data-show-steeper-yield-curves-have-not-been-negative-fo

Data shows steeper yield curves have not been negative for stocks. The following chart that highlights three previous times the Japanese yield curve sharply steepened in the past eight years. Every other period of steepening other than the current one coincided with S&P 500 gains.

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After all, this week comic from http://www.investing.com : Will Yellen kill the recent trend of spiking volatility or is it here to stay?

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