Tuesday August 4

Stocks fall after hawkish comments from a FOMC member. The S&P500 lost 0.2% to 2,093 and the Dow fell 0.3% to 17,550. Dennis Lockhart, who is the president of the Atlanta Fed and a voting member of the FOMC says that he is ready to support a September rate hike. This may come as a surprise to markets in the wake of soft employment cost data on Friday. The dollar is up 0.6% to 97.92 as a result of the comments. The 2 year yield is up 7 basis points to 0.73% and the 10 year yield rose 7 basis points to 2.22%. Factory orders were firm up 1.8% from the previous month compared to the expected 1.7%. Oil experienced a slight rebound, with brent increasing 1% to $49.99 and WTI rose to $45.76.

Bond issuance has increased over recent years to finance the M&A surge. Companies have been seeking to grow revenue through acquiring other companies. Low interest rates provide a good opportunity for large companies to return value to shareholders through debt financed stock buybacks or M&A. $290bn has been used to buy companies this year which is three times the level from 2014.

Junk bonds have been selling off in recent in spite of equities which have remained relatively firm. Equities and high yield oftentimes will move in tandem of one another. High yield in many ways acts as an equity mores than a fixed income instrument as the value is more contingent on the fundamentals of an issuer compared to interest rate changes. Equity volatility is currently low however in contrast high yield spreads have widened over Treasuries. The average yield on the Barclays high yield index is up from 4.64% on July 1 to 5.13% currently. The yield on the 10 year Treasury has fallen from 2.37% to 2.15% over the same period. The turmoil in high yield is largely due to the energy sector. One analyst says that usually equities usually follow high yield but currently markets are experiencing a unique situation because high yield movements are disconnected largely due to only one sector. Energy companies make up around 15% of high yield indices but only 7% of the S&P500.

Tuesday August 4

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