Stocks increase after weak economic data. The S&P rises 0.5% to 2,106 while the Dow rises 0.4% to 18,112. Today’s data showed that indistrial output fell 0.6% from the previous month against an estimate for a 0.3% decline. The positive movements in equities following weak data shows that markets expect more accomodative policy going forward. Fixed income and currency markets reflect this sentiment, as the ten year yield falls to 1.89% and the dollar index falls 0.4% as gold rises. Traders hope that the recent trend of weak economic data could push back interest rate increases. Oil prices rise for the fifth consecutive day and energy stocks rise as a result. In addition, Delta, Intel, and Netflix all post positive earnings reports which helps equities and lowers the VIX to 12.84. In Europe, the bund yield was hit by quantitative easing and uncertainty in Greece, falling to a record low of 0.107%.
The German finance minister Wolfgang Schäuble says that he doesn’t expect a solution to come out of bailout negotiations with Greece. This negative outlook from an official comes after discussions this month have shown little signs of progress, and as a result Schäble says that a new agreement is out of reach. Without a deal by the scheduled May 11 meeting, Greece will likely default on an e747M payment to the IMF. As a result of this uncertainty, 3 year Greek yields rise to a record of 24.6%. Internal talks within Greece show the possibility for a referendum with the Greek people. An overwhelming majority of Greek citizens want to stay in the eurozone. As a result, the referendum could be a way for the government to shift further away from the radical left, who want the leaders to leave the shared currency.
The IMF releases a report warning of a “super taper tantrum” referring to a sharp spike in interest rates at the Federal reserve raises interest rates. The report emphasizes rising risks around the world, especially in non-banking sectors which are harder to monitor. The group is especially paying attention to the life insurance sector in Europe, which may be struggling to meet guarantees in the extended period of historically low yields. In addition, the IMF says a 100bp rise in 10 year Treasury yields is a realistic possibility, and that emerging markets may face a significant shock in this case.
Junk bonds are typically the hardest hit when rallies in financial assets come to an end. Some analysts believe that high yield bonds may have reached the end of their run since returning 180% since 2009. Total returns have been greater than those of both the S&P500 and the broad bond market. The market for speculative grade debt may now be overbought, with average yields below 6%. Risky issuers face a tough climate going forward. Rising interest rates hurt the ability of these companies to refinance their liabilities. In addition to currency headwinds and falling oil prices, the high yield market faces challenges on several fronts. Rating agency S&P says that these three factors will likely lead to “negative rating actions” for corporate high yield borrowers, especially among high yield companies. The rating agency expects the default rate among risky borrowers to rise from 1.8% to 2.5% by the end of 2015. However despite all of these factors, historical data show that high yield may still be an attractive investment. When the Fed raised interest rates aggressively and unexpectedly in 1994, high yield outperfomed the broad debt market.