Monday March 16: Deal Optimism Helps Stocks

U.S. stocks rise on M&A deals and weak economic data. The S&P jumps 1.4% to 2,081 and the Dow adds 1.3% to 17,977 as Salix accepts a takover offer from Valeant and Life Time Fitness agreed to be bought by private equity firms. Factory production in the U.S. declined in February for the third straight month, and confidence among homebuilders unexpectedly fell. As a result investors speculate that it’s not a given that the Fed will raise rates in the immediate future, and these expectations are priced into the market as well. The VIX fell to 15.61, as the 10 year yield was down 3 basis points to 2.08%. In addition, the dollar index loses 0.8% and the euro appreciates to $1.0583.

Gold prices continue their trend of an inverse correlation with the U.S. dollar which dates back to the early 1970s. Generally, gold has fallen as the dollar strengthens. Gold rallied to start the year due to uncertainty in Greece, however the recent gains in the dollar have sent the metal down from this most recent high. Since August 2011 Gold has fallen 39% while the U.S. dollar index has risen 36%. With the dollar set to appreciate another 10-15% this year according to some forecasts, investors wonder what the bottom of the gold market will be. Net long positions in gold fell 26% for a sixth week according to the CFTC. Looking at past rate hiking cycles, gold has typically fallen 2% in the three months leading up to the increases. Gold and the dollar tend to move together in times of uncertainty such as during the financial crisis and this January during the eurozone crisis.

Germany’s Dax stock index breaks 12,000 for the first time as German equities benefit from the ECB’s quantitative easing program. Companies, especially manufacturers, are benefiting on the backdrop of record low interest rates, oil prices, and a weak euro. Germany is Europe’s biggest exporter, so this environment will be very conducive for growth of the German economy. The index has jumped 24% this year not including dividends, with an average dividend yield of 2.25%. This dividend rate is very attractive to investors in comparison to the 10 year government bond yield of .22%.

Attempts are under way to reshape the $700T global swaps market in further efforts to reform financial markets after the financial crisis. Markets for both swaps and futures have grown together over the past 30 years as banks use interest rate futures contracts to offset swaps trades. All futures markets use electronic trading platforms and clearing houses to manage risk. Following the financial crisis in 2008, regulators are trying to standardize swaps markets in this way however there has been some resistance to this model. Over the counter trading (not electronic trading) is more profitable for banks and customers prefer the flexibility. Banks argue that the existing structure allows them to maintain a more orderly market due to a disclosure of customers’ identities.

Monday March 16: Deal Optimism Helps Stocks

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