Thursday August 27

Stocks resume yesterday’s recovery with encouraging gains. The S&P500 rose 2.4% to 1,987 while the Dow added 2.3% to 16,654. Encouraging for investors was 2Q GDP revisions. GDP initially was measured to be 2.3%, it was expected to be revised to 3.2%, and it was actually revised to 3.7% which gave markets some support. Investors may have also been motivated to buy on the idea that rates may stay low for longer than expected, in addition to a 5.4% increase in the Shanghai Composite. Fed funds futures currently indicate a 28% chance of tightening in September. The VIX continues to drift downwards closing at 26.14. Jobless claims were also a sign of encouragement with claims remaining very low last week as only 271k filed. Oil rebounded $4 to $42.75 on signs of a stronger economy and the dollar rose against the euro to $1.1250. The two year Treasury yield added 3 basis points to 0.69% and the 10 year gained 2 basis points to 2.19%.

At the Jackson Hole symposium for Fed officials, many express concerns relating to China and the timing of monetary tightening. Expectations for a rate hike in September have greatly diminished. This sentiment was reinforced by William Dudley of the New York Fed saying a rate hike in September is “less compelling.” The main concern is judging the magnitude of the economic slowdown in China. The most apparent tool to gauge this is the plummeting stock market, but the equity market may be detached from economic fundamentals and not be indicative of precise economic movements. The main question will be how poor growth overseas will affect US companies and the US economy. US exports to China make up 1% of GDP however the ripple effect into other emerging markets may have far further reach. Another source of concern are China’s large holdings of US Treasuries. China owns the most US debt, and if the PBoC needs to liquidate Treasuries in order to intervene in currency markets that could lead to a spike in borrowing costs in the US. Furthermore China’s slowdown is a headwind to inflation and may prevent the metric from reaching the Fed’s 2% target. China’s slowdown has led to a near collapse in commodity prices. This sends the cost of many items down.
Ukraine finally reaches a deal with international creditors regarding debt relief. Creditors accepted a 20% principal write-down effective immediately. In addition short term repayments will be pushed back for four years. This appears to be a victory for Ukraine who has long negotiated for debt relief and creditors were very reluctant to provide it. However one large creditor, Russia, owns the entirety of a $3bn issuance that is set to mature in December and is not a participant in this deal. This could lead to problems late this year when it is time to make this payment. Markets had apparently priced in larger debt relief as the prices in 2017 bonds rose from 57 cents on the euro to 66 cents.
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Thursday August 27

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