Wednesday May 13

Stocks close flat on the day as volatility in bonds continues. The S&P finishes at 2,098 and the Dow closes at 18,060. Data today showed that retail sales disappointed with no change from last month, versus the expectation for a 0.2% gain. Also, import and export prices both fall even though they slight gains were expected in each. This development may reduce inflationary expectations and therefore calm the bond selloff. The Treasury yield rises 3 bp to 2.28% and the VIX declines. The dollar index falls 0.9% after the poor data, and gold rallies 1.8%. A BlackRock strategist suggests that the economic recovery isn’t as fast or as large as investors hoped.

Price movements and momentum across asset classes shifts in recent weeks. In the U.S. and in Europe there has been a selloff in equities and bonds, and the euro has risen to around $1.12 even though some analysts expected parity earlier in the year. The unwinding of the ECB trade has pushed yields and the euro upwards. Correlations among assets are changing, and fund managers have to interpret these changes. Inflation expectations are increasing, and as a result portfolio managers are holding less low yielding bonds. In recent weeks equities have fallen, in particular the German Dax falling 5% since mid April as bund yields have spiked and the appreciation of the euro hurts exporters.

An economic advisor in Italy says that a Greek default would not result in the Grexit. The rest of the Eurozone is preparing for a Greek default, and Europe’s institutions are ready to respond better than they were in 2011. According to the advisor, the the political goals and functions of the EU will override the economic affects of a Greek default. These comments come as Yanis Varoufakis recently said that the government will run out of cash within the coming weeks without additional support. During the Greek crisis in 2011, Italian bonds yielded as high as 7%. These bonds now yield just 1.82%, however they would spike and become more volatile in the event of a Grexit.

International investors in the U.S. corporate bond market may be deterred by the U.S. dollar’s weakening. International investors in corporate bonds hope to get returns in two forms, both from coupon payments and from dollar appreciation. 35% of the corporate bond market is held by international investors. 54% is held by institutional investors (pension funds and insurance companies) and 11% is held by asset managers in mutual funds or ETFs. If the dollar depreciates as bond prices fall, it could be two negative hits to investors. The size of the corporate bond market in the US has increased 49% since the financial crisis due to prolonged low interest rates. The dollar has fallen 4.5% against its peers this past month, which is putting a dent in the returns for foreign investors. If there is a large selloff from 35% of the market as borrowing costs from the Fed rise, it could be bad for US companies.

The central bank in Ghana increases interest rates in order to control inflation. The interest was raised 100 bp to 22%, however the country’s currency still depreciated. The cedi fell to an all time low of $3.955 (cedi/ dollar). This reflects how much the country is struggling due to falling commodity markets. Ghana is a large seller of oil and gold among other commodities. The cedi has fallen 18% versus the dollar this year.

Wednesday May 13

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