Stocks fall so start the week as transportation companies lead losses. The S&P loses .2% to 2,104 and the Dow falls slightly .06% to 18,116. To strong factor in particular drove markets today, and as a result stocks stay in the upper end of the recent trading range. The S&P continues its streak of 24 trading days without back-to-back gains reflecting a choppy environment. Stanley Fischer says that interest rates hikes will likely come before the end of the end of the year and the following increases won’t be uniform in amount and predictable in timing. In addition the President of the Cleveland Fed says that it is appropriate to raise rates this year. The VIX rises 3% to 13.41, and treasury yields fall to .58% and 1.91% for the two and ten year respectively. The dollar index depreciates another 1%, and the euro consequently increases to $1.0964. According to a currency analyst at Bank of Tokyo, Fed tightening is hardly priced into the dollar or short term interest rates right now, which will likely change over the next few weeks or months.
Some fixed income fund managers are concerned about a potential liquidity crunch in global bond markets. Regulators are worried about corporate and emerging market bonds where prices have risen heavily due to strong demand from investors. If a significant portion of these investors try to sell and bring their money back to the U.S. when rates rise, sellers may be forced to sell at a serious discount. In addition, due to tougher capital regulations on banks, the largest financial institutions won’t be able to support the selloff by providing liquidity. A commissioner at the SEC warns that the corporate bond market may be a systemic risk to the economy if rates rise heavily. As a result, there is a debate regarding whether asset managers should be considered “systemically important” and if they should be subjected to stress tests and more strict regulation.
An interest rate strategist at BoAML says that markets are underestimating the likelihood that the Fed does not raise rates at all in 2015. The current implied probability of no rate hike is 14%, however if inflation continues to decline the Fed will not be “reasonably confident” that inflation is on track to reach 2%. Although the report notes that rates are expected to rise in September, the chances of no rate hike this year are higher than 14%.
Angela Merkel encourages Alexis Tsipras to continue to meet guidelines imposed by Greece’s creditors, saying that she wants Greece to succeed and stay in the eurozone. Tsipras comments that he and Merkel are trying to find common ground to reach an agreement soon before another potential crisis in June. Merkel says that Greece must convince its creditors that economic policy proposals sufficiently boost competitiveness and trim spending in order for the aid to continue.
Shadow banking has made a resilient comeback after shrinking by almost 50% during the financial crisis. Forms of loans made in the shadow banking system include money-market funds, repurchase agreements, and commercial paper. The president of the Center for Financial Stability says that the economy is currently below potential partially due “market finance” failing to support growth. Regulators have been attempting to restrict market finance since the crisis, when banks used securities as collateral for loans which led to collapse when the securities turned out to be virtually worthless.