Thursday August 13

Stocks mixed as economic data shows no definitive direction for the US economy. The S&P500 lost 0.1% and the Dow rose marginally to 17,408. Jobless claims remained at a historically low level, as 274k people filed for unemployment benefits this week which was slightly higher than expectations. Retail sales were firm and were in line with expectations for modest monthly gains. Import and export prices continue to show deflationary pressures, with import prices down 10% year on year and down almost 1% on the month. Stocks were dragged down with oil as WTI lost $1 to $42.25. Yields were up off of yesterdays lows, and the dollar index rose modestly. The 2 year yield increased 5 basis points to 0.71% and the 10 year yield rose 5 basis points to 2.18%.

Markets speculate that China’s recent devaluation calls September tightening into question. This continues the trend of concerns on the international landscape in relation to the Fed’s decision. Dovish members of the FOMC may want to hold off before raising rates. Market expectations for tightening appear to be falling, and the odds of a rate hike indicated by fed funds futures are decreasing. Currency wars have been hurting US companies, and will continue to do so in the foreseeable future. One HSBC analyst says that the odds of a rate hike in September are down to one in three. To reflect this expectation the 10 year yield reached a three month low yesterday and the dollar index fell 1.3%.

Concern in Europe continues over Greece’s large debt pile. The European Commission and the ECB say extending maturities would help put the country on a more sustainable economic and financial path. The IMF also supports a haircut on debt. Parliaments across Europe (including Greece) are currently in the process of passing the third bailout program. Germany is taking a hard stance, and has been reluctant on the topic of debt relief. The fiscally conservative country has stressed that it does not want to rush into any reforms, and says that a haircut on debt would be illegal according to EU treaties. The European Commission believes that an extension to maturities would eliminate the need for a haircut, and without extensions it would raise “serious concerns” about Greece’s finances. Greece’s debt to GDP ratio is expected to be 201% IN 2016 according to European Commission projections. This ratio will fall to 175% by 2020 and 160% by 2022. The report suggested that finance ministers could transfer profits made from Greek bond payments to the Greek central banks to help reduce the ratio.

US banks are dominating the financial industry landscape. Many European banks are undergoing strategic changes, which has allowed the top five US banks to take 33.5% of global investment banking fees so far this year. The five largest European banks have taken 17.2% of fees, and the gap between these two figures is the largest since 2009. European banks have been pulling back from investment banking, streamlining their departments in order to improve shareholder value. This reduces their ability to pull in larger deals and complex transactions, which in turn leads to lower fees. US banks have been fortunate to have stability at the CEO position. Three of five European banks have removed their CEOs in recent months. Credit Suisse transitioned from Brady Dougan to Tidjane Thiam. Deutsche replaced its co-CEOs with John Cryan, and Barclays is currently looking for a permanent replacement. Goldman Sachs’ share of the fee pool is up from 6.6% last year to 7.8% this year, which is the largest increase among the top 15 banks. JP Morgan has the highest share of the total pool with 8%. This difference could worsen as European banks cut back and investments made by US banks begin to pay off.

Thursday August 13

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