Tuesday May 12

Stocks fall as bond markets continue to correct. The S&P falls 0.3% to 2,099 while the Dow loses 0.2% to 18,068. Quantitative easing in Europe has pushed bond prices to extremely high levels, and markets have been correcting this past week. John Williams says the Fed is in “wait and see mode” heading into the June meeting. S&P earnings are now expected to grow 0.2% in 1Q verses a 5.8% decline which was predicted as recently as March. The VIX falls to 13.86, however volatility is becoming increasingly present in bond markets all around the world. Bund yields touch 0.74% and settle at 0.68% up 8bp on the day. Peripheral euro bonds move similarly. Treasuries touch 2.37% however finish 1bp lower at 2.26%. Traders are currently unwinding positions that were taken with deflationary expectations in mind. Quantitative easing in Europe, rate cuts in China, and oil price stablization all reduce deflationary fears. The dollar index falls 0.5% and the euro appreciates to $1.123 as the gap between German and Treasury yields becomes smaller. This further incentivizes investors to buy bunds, appreciating the euro.

Greece uses its cash held at the IMF to make its €750M payment to the IMF. €650M of this payment came from the Special Drawing Rights pool of money that Greece holds at the fund. This is the first payment in a series of large payments that Greece must make over the next several months. Greece is expected to replace these funds over the next several months. All Eurozone countries hold SDR funds at the IMF, however they are rarely tapped for use. Most countries hold around €985M, however Greece had €700M at the end of March. It is highly unusual to use these funds which are held at the IMF to make a payment to the IMF. Yanis Varoufakis says that the liquidity and cash issue in Greece is high urgency, and it will reach a critical point in the next couple of weeks. Wide and volatile movements in Euro yields hurt stock prices. Lower yields privide low protection in the event of high inflation. Falling bond prices and rising yields indicate the shift in investor sentiment. Bond selloffs in the US, Europe, and Asia result in volatility in currency and equities. According to a UBS fixed income strategist, the “path of least resistance is upwards” for yields. 30 year Treasury bonds now yield above 3.10% for the first time since October. Total return for the last month was -4.8%.

The Senate Banking Committee proposes a rollback of financial regulatory reform. This releases 30 institutions from “systemic importance” designation, which will be positive for deals going forward. The threshold for systemic importance may be raised from $50B to $500B, and this number will increase with GDP. This supports middle market firms, however most bulge brackets will still be considered systemically important.

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Tuesday May 12

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