Stocks continue to reach record highs as discretionary stocks bolster confidence over the economy. Nasdaq tops 5,000 for the first time since 2000, S&P increases .6% to 2,117 and DJIA jumps .9% to 18,288. Momentum is building in stocks with the highest prospects for growth, which is good for the confidence of the financial markets and for consumers. Adjusted for inflation, consumer purchases rose in January which could reflect the effects of low oil prices on consumers. The VIX fell to 13.04 after falling 36% in February for its biggest monthly drop on record. The U.S. dollar index increases .2% as markets continue to price in rate hikes later this year. The two year and ten year yields increase 4bp to .66% and 9bp to 2.09% respectively.
Demand for eurozone securities increases ahead of ECB government bond purchases as $19.3 billion has flowed into eurozone ETFs this year. More than $15 billion of that sum went into equities as European stocks have hit record highs even as bond yields have hit record lows ahead of QE. Prospects for the eurozone are looking more positive in recent months, as some economic indicators have suggested growth, the euro continues to weaken and low oil costs will all contribute to the recovery.
U.S. SEC member Daniel Gallagher warns of systemic risk in the corporate bond market. Amid low interest rates in the past seven years that have favored issuers, the corporate bond market has balloned to $7.3 trillion. Last year the SEC started stress testing whether fixed income mutual funds could withstand a potential sell-off, and although the results haven’t been made public many large money managers have warned that the market is set for failure.
As a result, many of the biggest mutual funds are preparing for the rate hikes, by increasing the amount of cash in their portfolios and boosting their holdings of corporate bond ETFs instead of buying and selling debt over the counter. Since ETFs trade like stocks, this could deflect the potential illiquity problem in mutual funds to the ETF market. Barclays analysts writes that there may be liquidity mismatches between bonds and the funds that are used to trade them. “A growing demand for liquidity may have led to increased instability and fire-sale risk in corporate debt markets.” Bonds demoninated in U.S. dollars fell 1% in February as the Fed prepares to raise rates.
Negotiations for Greece’s next bailout package ranges between 30 and 50 billion euros. The new accord would provide “flexibility” and new conditions for Greece, according to the Spanish economy minister Luis de Guindos who’s country would contribute 13-14% of the amount. De Guindos is a frontrunner to take over as president of the group of European finance ministers, stresses that Greece will not leave the euro as it would be bad for Europe as well as the monetary union. On the contrary, Alexis Tsipras insists that Greece will not seek a third bailout program. However Greece will most likely need additional cash after the current program expires in four months, and it’s unlikely that they will be able to use the capital markets.