U.S. stocks increase amid deals and the start to QE in Europe. The S&P increases .4% to 2,079 and the DJIA increases .8% to 17,995. Corporate M&A deals show that companies are finding value in other companies, and optimistic feelings about growth in Europe contribute to upward momentum in Europe. The S&P currently trades at 18.8x future earnings which is near a five year high and above the average of 16.9. Bond yields around Europe fall as ECB and the Bank of Finland buy government bonds. The German 10 year yield falls 9 basis points to .31%. The 10 year U.S. yield fell 4 basis points to 2.20% as the dollar depreciates slightly against a basket of peers. In particular the euro gains .2% on the dollar to $1.0862. Gold continues to slide due to the strength of the dollar.
The European Central Bank begins its QE program with sovereign bond purchases which marks the official start to inject 1.1 trillion-euros in the European economy over the next 19 months. Today’s purchases included bonds from at least five countries with the size of individual trades ranging between 15 million-euros and 50 million-euros each, which is relatively small compared to the program’s goals (about 45 billion-euros each month). Yields in German, Italian, Belgian, French, and Spanish bonds. Bond purchases will be made in proportion to the capital that each country has contributed to the ECB although this guideline doesn’t have to be strictly adhered to each month. There is flexibility with regards to the maturity of bonds as well. The potential scarcity among bonds in the region pushed the average yield to maturity in the region to .538%. The fall in yields helps to weaken the euro as it gives investors less incentive to hold debt denominated in euros.
Greece will resume talks with its creditors this week in order to avoid market turmoil in June with another deadline deal. Finance ministers continue to express a desire to help Greece as long as Greece is taking proactive steps to improve its economic health. Greece must continue to meet various conditions in order to maintain short term financing.
The Brazilian real depreciates to an eleven year low due to rising political risk. Brazilian President Dilma Rousseff favors fiscal austerity however her support for such policies caused riots and protests in major cities over the weekend. The real depreciated 1.3% against the dollar on the day to 3.1039 (BRL/USD) which brings the fall to 14.5% on the year amid falling commodity prices, political risk, and economic weakness. The Brazilian president supports budget cuts, and increases to taxes and interest rates, all of which are heavily opposed by her constituency.
Bill Gross’s new bond fund experiences heavy outflows in February as investors have shown concerns regarding unconstrained bond funds in recent months. Unlike traditional bond funds, unconstrained funds give fund managers more flexibility across fixed income markets and allow them to take short positions. This marks the first month of outflows since Gross arrived at Janus, and it comes after Janus revealed that half of the assets in the fund belong to Gross. It’s possible that investors fear a lack of liquidity in the short positions in Gross’s Global Unconstrained Fund ahead of interest rate hikes.
A global strategist at Societe Generale expresses concern over falling currency reserves at various central banks around the world. Albert Edwards (who is typically bearish) says that foreign reserves, which are a key measure of global liquidity, are falling fast which could result in a “strangle” on the global economy. This could refer to the potential problem that could arise when foreign central banks need to intervene in markets through open market operations without reserves.