Tuesday March 10: Strengthening Dollar Hurts Stocks

Stocks fall as investors fear strengthening dollar could put a dent in U.S. corporate earnings. S&P loses 1.7% to 2,044 and the Dow loses 1.9% to 17,662 which erases 2015 gains for both indices. Today’s losses bring the S&P 500 down .7% for the year. In 2015, the S&P500 has fallen in 19 out of the 27 trading days when the dollar has risen. The strength of the dollar may be due to monetary policy divergence. Major central banks around the world including Sydney, Tokyo, Zurich, and Frankfurt are all cutting rates and buying bonds to stimulate growth. These aggressive policies lead to weakened domestic currencies, and positive economic prospects for the U.S. along with these external pressures lead to a very appreciated dollar versus many peers. Today’s losses were due to fears that U.S. exports will fall due to the dollar’s upward momentum. The VIX jumps to 16.69 as the U.S. 10 year yield falls 7 basis points to 2.13% due to a possible risk-off atmosphere. The German 10 year bund yield falls 8 points to .23%. Commodities including oil, copper, and gold all fall as well.

The U.S. dollar has continued its upward momentum against almost all major peers, including the Canadian dollar, Mexican peso, and the euro among others. The dollar index today rose .9% to 98.47. In particular, the euro continues to slide closer to parity falling 1.4% to $1.0695 today. Brent crude oil also falls 3.4% to $56.55, as crude often moves inversely with the dollar. The drastic appreciation of the dollar and the depreciation fo the euro reflect the central bank monetary policy divergence between the two regions. The euro has fallen much faster than analysts expected as just 1 one of 32 economists predicted euro-dollar parity in 2015. Today Deutsche Bank analysts update their projections for the euro to $0.90 by 2016 and $0.85 by 2017.

Protections for junk bond investors are trending downwards as riskier borrowers have more control over issuance terms. Risky borrowers typically offer certain protections to safeguard investors, and the scope of these protections are at the lowest level since records were started in 2011. Moody’s covenant-quality gauge (5 = weakest protections, 1 = strongest protections) measured 4.51 for bonds issued in February. Covenants are protections written into bond terms which among other restrictions can limit an issuers to borrow more. Due to record low interest rates, investors are looking for yield in junk bond markets, which gives riskier issuers borrowers more flexibility.

Steve Cohen’s Point72 Asset Management has hired 30 people to specialize in building computer models that collect and analyze patterns in data. This is part of a project to expand quantitative investing at Point72, joining pushes for computer-based trading from Bridgewater Associates, Renaissance Technologies, and Two Sigma. Quantitative algorithms at Bridgewater will be able to learn as markets change and adapt compared to traditional models that follow static instructions. Programs are shifting to be able to read “unstructured data,” for example news reports, research reports, blogs, or social media.

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Tuesday March 10: Strengthening Dollar Hurts Stocks

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