In continuation to the US CDS signals following the "Rebel Yell", Bank of America Merrill Lynch in their note entitled "The declining duration of fiscal concerns" from the 11th of October added the following in relation to volume in the US CDS sovereign space:
"The weekly DTCC data shows a fair amount of trading supporting the widening of CDS spreads on the US sovereign we have seen recently, as 1-year spreads widened to 60bps from less than 10bps. Specifically the net position in CDS increased by about $250mm during each of the past two weeks to about $3.6bn as of last Friday. That corresponds to about a third of the typical trading volume (not changes in net notional) in the most liquid corporate names. As trading volumes most likely exceed changes in net notional, clearly US sovereign CDS contracts have been fairly liquid over the past two weeks and the widening of spreads reflects real risk taking as opposed to a lack of liquidity. Note that the net notional is still dwarfed by what we saw in 2011, while spreads are similar.
"QE tapering"soon? We do not think so. Markets participants have had much lower inflation expectations in the world, leading to a significantly growing divergence between the S&P 500 and the US 10 year breakeven, indicative of the deflationary forces at play".
The divergence between the S&P 500 and the US 10 year breakeven, graph source Bloomberg:
Weak global economy, with weak global demand as illustrated by shipping rates as indicated by data from the World Container Index data - source Bloomberg:
Weakness continues to be driven by Asia, as rates from Shanghai to Rotterdam fell 7.3%, followed by Shanghai to Los Angeles (down 4.8%), Shanghai to Genoa (4.7% lower) and Shanghai to New York (down 3.2%) routes. Rates rose for Rotterdam to Shanghai (4.7%) and to New York (1.6%)." - source Bloomberg.
While the recent range break-out in the Baltic Dry Index is supposedly indicative of a strong economic rebound, we think the respite is temporary - graph source Bloomberg:
Some pundits as well have become more upbeat on iron-ore freight and scrapping levels as indicated in the below Chart of the Day from Bloomberg depicting fleet expansion versus ships' scrapping. We remain wary given the deflationary forces at play - graph source Bloomberg:
The CHART OF THE DAY shows how rates, in blue, for Capesize ships hauling 160,000 metric tons of iron ore rose to a 34-month high of $42,211 a day on Sept. 25. Scrapping levels are in red.
Owners have paid off debt used to buy older vessels, making them cheaper to run, so they won’t opt for scrapping as long as the rally allows them to profit from the ships, according to Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo. Chinese investment in rail, buildings and infrastructure will rise 20 percent this year, creating demand for another 135 million tons of steel, Shanghai-based Citic Securities Co. says. That would require 200 million tons of iron ore, used to produce the alloy, enough to fill 180 Capesizes, according to Fearnley Consultants A/S, a research company in Oslo. Capesize fleet capacity is up 75 percent since 2008, says IHS Maritime, a Coulsdon, England-based maritime researcher. “Freight rates are expected to return to profitable levels- even for older tonnage,” said Stavseth, whose recommendations on shipping company shares returned 26 percent in the past year.
“This will potentially lead to higher net fleet growth.” World trade in iron ore will grow 6 percent to 1.17 billion tons this year, with China taking two-thirds, according to Clarkson Plc, the biggest shipbroker. Earnings for Capesize carriers sailing to China from Brazil at a $40,000 daily rate assuming a voyage time of 45 days will equate to $1.8 million, spurring owners to keep trading their ships, Stavseth said." - source Bloomberg
We remain wary because we have yet to see a clear reduction in the number of ships being broken-up - graph source Bloomberg:
We remain wary because we have not seen a confirmed rebound in Chinese Iron Ore imports which are correlated to the Australian dollar - graph source Bloomberg:
As displayed in Deutsche Bank weekly Shipping note from the 7th of October 2013, Chinese Ore Inventory remains well below 2012 levels:
But there are some improvements in monthly Chinese Iron Ore Imports as indicated by Deutsche Bank:
We have already touched on "the link between consumer spending, housing, credit growth and shipping":
"If there is a genuine recovery in housing driven by consumer confidence leading to consumer spending, one would expect a significant rebound in the Baltic Dry Index given that containerized traffic is dominated by the shipping of consumer products."
The worry for us as of late is that consumer sentiment in the US has fallen in October to a 9th month low making us questioning the strength of the rebound in shipping, as per Ben Schenkel's article from the 11th of October entitled "Consumer Sentiment in U.S. Fell in October to Nine-Month Low":
"Consumer sentiment in the U.S. fell in October to a nine-month low as the government’s partial shutdown and the debt-ceiling debate caused outlooks to sour.
The Thomson Reuters/University of Michigan preliminary consumer sentiment index of decreased to 75.2 this month from 77.5 in September. Economists in a Bloomberg survey projected a drop to 75.3, according to the median estimate.
Households are becoming pessimistic about the economy as the shutdown heads into a third week and the deadline looms for raising the debt limit and avoiding a default. Nonetheless, improved stock values and home prices have lent support to balance sheets, especially for wealthier Americans.
“Since the shutdown began, consumer sentiment has taken a hit,” Brian Jones, senior U.S. economist for Societe Generale in New York, said before the report. “The average person is sensitive to the headlines about the debt ceiling and the adverse impact of a technical default.” Projections of the 68 economists surveyed by Bloomberg ranged from 65 to 80. The index averaged 89 in the five years leading up to the economic slump that began in December 2007, and 64.2 during the 18-month recession that ensued." - source Bloomberg.
This leads us not to believe the Fed will "taper" in 2013. For 2014, we are not too sure either...That's our own "Rebel Yell".