Monday May 18

Stocks rise to new records on momentum from last week. The S&P adds 0.3% to 2,129 and the Dow adds 0.1% to 18,298 both of which are record highs. Positive sentiment comes from the idea that the weaker dollar will support multinational companies, and that bad data will prevent the Fed from raising rates any time soon. The dollar rebounds 1.1% after four days of losses and the euro falls to $1.13. Ten year Treasury yields gain 8 bp to 2.22% and the two year adds 3 bp to 0.57% ahead of the release of FOMC minutes later this week. Data today showed homebuilder confidence unexpectedly fell. Charles Evans of the Chicago Fed, a voting member who typically lies on the dovish side, says that the Fed should wait until early 2016 to raise interest rates as inflation is still well below the 2% target. Ahead of the FOMC minutes on Wednesday, analysts at Miller Tabak say that rate hikes are unlikely before the end of the year as a result of the uncertainty portrayed in recent economic data. Yields rise in Greece as a result of the continued lack of progress, and it’s possible that Greece may face a “take it or leave it” deal in the near future.

Greece hasn’t made enough progress for a deal this week. The IMF needs to totally support any efforts made by the European Commission to reach a deal with Greece. This contrasts reports from Athens, who claims that it is moving closer to a deal with its creditors. Prime Minister Alexis Tsipras said that talks were in the final stage, and that the deal incorporates a writedown and restructuring of debt along with protection for wages and pensions. As a result of continued uncertainty and pessimism, yields on 2017 bonds rise 308 bp on the day.

Over $100B in oil projects have been stopped as a result of the dramatic fall in the oil price since last June. This represents investment in new projects that has been cut or postponed. Shell, BP, ConocoPhillips, Statoil, and similar companies have cut 26 major projects all around the world. This reflects the oil industry adjusting to new market levels and the shale slowdown. $118B total cuts spread over several years will delay production. As much as 1.5 million barrels per day will reach market two years later than planned. This will help prices stabilize in the interim. More cuts are likely to come, as Goldman Sachs has identified 61 additional projects that are uneconomic at $60 dollars a barrel for a total of $750B additional potential cuts. Emerging markets such as Angola, Nigeria, Australia, and Algeria will see investment fall by around 50%.

The gold market in London has become increasingly illiquid recently, which appears to be a developing trend across markets. This a result of banks caling back or exiting commodities businesses. As a result for investors the cost of hedging with gold may increase going forward. Investors note that it is difficult to make large transactions (100,000 to 200,000 oz) without heavily influencing the price. Markets are experiencing “frenetic liquidity” which refers to choppiness in the market, as liquidity can appear and disappear quickly. OTC gold derivatives held by banks are at the lowest level since 2005. While markets have dried up in London, China’s market is expanding. China is the largest producer and consumer of gold, and the market is expected to develop rapidly over the next year.

Monday May 18

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