Monday July 27

Stocks fall for the fifth consecutive day of losses. The S&P500 lost 0.6% to 2,067 and the Dow fell 0.7% to 17,440. Concern today was triggered today by markets in China, which resumed their selloff overnight after finding support for a few weeks. US economic data today was positive. New durable goods orders beat expectations rising 3.4% from the previous month compared to the estimated 3.1%. Excluding transportation orders, this figure was up 0.8% against an expected0.5%. Nevertheless, Treasuries experienced a flight to quality with the ten year falling 5 basis points to 2.21% and the 2 year down 3 basis points to 0.65%. The US dollar fell as a result of lower yields 0.7% to 96.54 for the dollar index. The yen, German bund, and US Treasuries were the main beneficiaries of unease in China. The yen was up against the dollar to Y123.23 (JPY per USD). The bund yield lost 1 basis point to 0.69%.

The US economy is showing signs of strength, most recently expressed in today’s housing data. The improvements to the housing market reflect underlying positive developments in the overall economy. This supports the Fed’s case for higher interest rates. The FOMC is meeting Tuesday and Wednesday and without a doubt will pay attention to today’s data. Yellen recently commented that there are risks to waiting too long to raise interest rates. The US dollar has risen recently, and still poses a headwind to exports and inflation. Greek risk is subsiding. The market for Fed Funds Futures is currently pricing in odds below 50% of a rate hike in September. Yellen has not yet ruled out September tightening, and in June she said she was still looking for more decisive evidence before raising interest rates. Housing data has now come in as strong, recent unemployment data has been positive, GDP on Thursday is expected to reflect modest 2.5% annual growth with upward revisions to 1Q GDP.

Stocks in China resume their free fall with an 8.5% decline in spite of recent support by regulators. The Shanghai composite suffered its second biggest fall in history, only behind the 2007 crash that affected markets all around the world. Regulators have been trying to prop up stock markets over the past month. The market crash last month resulted in losses of more than $3tn in equity value. This has resulted in calls for further reduction in interest rates and reductions to capital requirements for Chinese banks. More than 1,700 stocks fell by the maximum daily limit of 10%. Retail investors are spooked, as many have made highly leveraged bets on the markets. There is no consensus explanation for today’s drop. Markets have reentry been supported by the banning of short selling, sales by big shareholders, extensions of loans to brokerages from the PBoC, and state investment funds buying shares and tracker funds to boost indexes. Markets had previously risen 16% since their July trough as a result of these support mechanisms.

A group of Puerto Rico bondholders submit their plan for how the country’s debt pile should be death with. They commissioned a report along with former IMF economists. Together, the group represents $5.2bn of debt and 38 investment managers including hedge funds and asset managers. The report concludes that they can avoid default. The report issued by Puerto Rican governor Alejandro Garcia Padilla says the government is in a worse position, and that a default is inevitable. Today’s report claims that the territory can have a surplus by July 1 2016 (fiscal year 2016). Before then, it will require short term financing of $2.5bn to bridge the gap before then. According to bondholders, Puerto Rico can improve the deficit by improving tax collection and reducing government expenses. Puerto Rico currently only collects 56% of potential tax revenue. If the territory could achieve the US average of 83% then it would add an additional $1.1bn.

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Monday July 27

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