Stocks slide downward ahead of jobs data on Friday. S&P falls .4% to 2,098 and the Dow falls .6% to 18,096. Markets are vulnerable to short-term declines ahead of major economic data and news headlines as valuations may appear to be stretched in the meantime. The S&P 500 is currently trading at 18.9 projected earnings. The VIX increases slightly to 14.23. Central banks in India and Poland both cut interest rates citing concerns about disinflation, which contributes to the theme of central bank divergence around the world. U.S. treasury yields were flat and German bund yield increases 1 basis point to .38%. The strength of the dollar pushes gold down.
With government bond yields so low in Europe, many European investors are looking for yield in the corporate sector. As a result many U.S. corporations are looking to take advantage of the opportunity. U.S. debt issuances are up 160% compared to this time last year. Rates of Europe are so low that companies have the option to issue debt in euros and convert this debt into dollars considering the weakness of the euro right now. Today, the euro depreciated to its lowest level against the dollar in more than 11 years. The euro falls to $1.1066 ahead of ECB meeting tomorrow which will outline details of the QE program, and ahead of the release of U.S. jobs report on Friday. If U.S. employment data continues to improve, then the dollar is likely to continue to strengthen as the Fed begins tightening monetary policy.
Transcripts from Fed meetings in 2009 show the Fed’s concerns and fears following the financial crisis. At first asset buying purchases failed to gain traction among Fed members as Richard Fisher voiced concerns about how the central bank could be seen as the “handmaid of the Treasury.” At the time Janet Yellen drew a comparison to the corporate sector in Japan in the 1990s when “the attempt of firms to pay down debt produced a decade of weak investment.” The transcripts show that at the time, Fed officials were much more worried about deflation than inflation.
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Shadow banks are poised to take a 7% cut of annual profits at traditional banks. Analysts at Goldman Sachs say that the relatively new industry has grown rapidly due to new technology, low interest rates, and regulation that has inhibited traditional banks as it relates to both banking and lending practices. Goldman used the term “shadow bank” to refer to a variety of firms including companies that facilitate peer to peer lending by matching borrowers with lenders directly, as well as private equity and investment funds that have shifted towards more traditional banking roles. The emergence of such firms could result in the way many financial products are priced, as banks will have to lower their fees to remain competitive with shadow banks.