Stocks rise as Treasury yields and the dollar slide. The S&P adds 0.16% to 2,095 while the Dow adds 0.33% to 18,036. These movements come after positive earnings reports from JP Morgan and Johnson and Johnson. Today’s U.S. data releases included the PPI and retail sales. The PPI met estimates, however retail sales only increased 0.9% from the previous month versus the estimated 1.1% increase. As a result Treasury yields and the U.S. dollar fall, possibly due to speculation that the Fed will push back rate hikes due to the weak data. The two year Treasury yield falls to 0.51% while the ten year falls 3 bp to 1.90%. In Europe, data showed industrial production increased more than expected and the euro appreciates to $1.0648. In addition, after news from Greece that they are preparing for a default, the bund yield falls to 0.14% while short term bond yields spike in Greece.
Simon Potter, the head of the Federal Reserve Market’s Group warns of further volatility in bond prices. He urged primary dealers (sell side investment banks) to support markets in the event of wide price swings. According to Potter, banks have a responsibility to support efficiency in the market, and that banks need to be vigilant and careful with their positions. Traders at banks argue that maintaining liquidity in the current environment of increased regulation is difficult. In addition, banks may believe that the Fed has created this environment by buying $2.5T of Treasury bonds, and therefore removing them from the marketplace. This large-scale position has had a negative effect on liquidity.
Government bond yields in Greece rise heavily today following yesterday’s headline that the country is preparing for a default on their debt. Yields spike, especially on the short end of the curve, which furthers the inversion of the yield curve. The July 2016 bond yield rises to 21.49% while the ten year bond currently trades with a yield of 11.4%. European government bond markets reflect a haven movement, with the German bund yield falling.
JP Morgan’s stock rises after the bank reported better than expected earnings today. Net income increased 12% from the previous year, revenue 4%, and earnings per share beat expectations as well. These positive results come in spite of legal expenses of $487M and ongoing investigations into alleged forex manipulation and hiring practices in Asia. In addition, trading revenues at the bank increased 9% from the previous year with notable gains in fixed income and equities. JPM’s results raise optimism for other financial’s earnings reports later this week, such as Citi, BoAML, Goldman Sachs, and Morgan Stanley.
A survey of global investment managers shows widespread concern of overvaluation in both fixed income and equity markets. Four out of every five managers believe that bonds are overvalued, representing the largest portion since the survey began in 1998. One out of four managers think equities are overvalued, which is the highest portion since the dotcom bubble in 2000. The survey shows that managers believe that the United States has the greatest risk of overvalued assets. In addition, one managing director in Europe says that the ECB’s QE policy is “too much too late.” Essentially, by starting quantitative easing when rates were already low, the ECB created distortions and overvaluations in bond prices, which can be seen with many sovereign yields in negative territory.