Stocks rise on optimism that Greek will come to an agreement with its creditors (despite the fact that Germany says it has no plans to discuss restructuring). However despite Germany’s strict tone, investors hope that Greece presents an acceptable plan to a group of EU finance ministers. S&P erases the year’s losses as it increases 1.1% to 2,068 and DJIA jumps .8% to 17,868. Decrease in default risk in Greece pushes down Greek bond yields. Oil and copper both fall on weak China data, which diminishes demand outlook. U.S. dollar index climbs as the dollar gains versus the euro and the yen. Haven assets reflect risk-off attitude as 10 year bund yield rises to .37%, gold falls slightly, and the US 10 year yield increases 2bp to a one month high.
John Williams (president of the San Francisco Fed) says that the Fed shouldn’t be afraid of creating volatility in financial markets when they raise rates this year, and he says that the hikes are getting “closer and closer.” Williams typically falls on the dovish side of the spectrum and he is a voting member of the Fed. This forward guidance comes as a result of January’s wage growth and hiring report. Despite economic indicators suggesting that the U.S. economy is prepared for a rate hike, global deflationary pressures suggest otherwise. Williams counters this idea by saying that the Fed prefers to be ahead of the inflation curve rather than behind it.
As a result of the imminent rate hikes, the appeal of emerging market bonds is likely to go away as the Fed begins to normalize rates. Demand for the popular carry trade (borrowing cheaply in developed countries, investing in high yield emerging countries) will decrease. Weakening emerging market currencies also reduce the appeal for the carry trade. The months following the rate hikes could be reminiscent of the emerging market selloff that followed the end of quantitative easing last spring.
Apple and Microsoft both issue bonds, continuing the trend in order to lock in low interest rates. Cost of funds are so low it makes more sense to borrow than to spend cash reserves. Microsoft issues $10.8B in bonds with AAA ratings with maturity up to 40 years. Apple, despite almost $20B in cash issued $6.5B last week in the U.S. and is now looking for its first ever swiss offering (due to negative interest rates). A cause for concern is that corporate bonds are more sensitive to rate hikes, so these bonds may fall when the Fed raises rates in the future.