Stocks suffer heavy losses despite encouraging economic data. The S&P and the Dow both fall 2.1% to 2,036 and 16,990 respectively. This represents the biggest one day decline for the S&P500 since early 2014. Jobless claims continue to remain at historically low levels, a Philadelphia Fed business outlook survey beat expectations, and existing home sales grew at a faster rate than expected as well. Today’s selloff was a function of global concerns triggered by falling commodity prices, the Fed’s international concern indicated from yesterday’s minutes, and currency wars around the world. Investors are worried that a large scale global economic slowdown could harm the US. As a result long dated yields fall and the yield curve flattens. The two year gained 1 basis point to 0.67%. The ten year fell 5 basis points to 2.08% while the thirty year yield fell 7 basis points to 2.75%. In response to lower yields the dollar index fell 0.4%.
Uncertainty continues in Greece as Alexis Tsipras steps down and calls for a snap election to be held on September 20. This could be a tactic used to minimize the presence of the radical Syriza party in parliament and result in a more stable coalition government. In the meantime the interim administration will be unable to implement reforms in the short term, which will complicate further discussions with creditors. Tsipras has 61% approval ratings, as he is seen by the Greek people to have fought hard for the best possible deal given the circumstances.
Mexico hedges oil at $49 per barrel for the upcoming year. At a cost of $1bn the oil reliant country purchased put options that enable Mexico to sell oil at $49 per barrel. In 2015 the government hedged prices significantly higher at $76.40. In spite of this large decrease, it still may prove to be a useful hedge for the country as the grade of oil that is produced in Mexico currently trades around $38 per barrel. Barclays, Citi, Goldman Sachs, JPMorgan, and Morgan Stanley were among the banks that participated in the transaction that sold put options.
Today’s stock losses were largely due to a decline in sentiment as a result of emerging market turmoil. Impending rate increases in the US and competitive devaluations most recently in China, Kazakhstan, and Vietnam add on to the problems that plague emerging markets on top of low commodity prices. The tenge depreciated more than 20% after the Kazakhstan central bank removed a peg. The South African rand, Turkish lira, Russian double, and Colombian peso all have fallen heavily this week. Higher rates in the US make US assets more attractive to hold for investors, offering more yield with oftentimes less risk. This has led to large scale capital outflows from emerging market investments.