Thursday September 24

Stocks fall on further global growth concerns. The S&P500 fell 0.3% to 1,932 and the Dow Jones to 16,201. Indexes fell in the US, China, Europe, and Japan ahead of Janet Yellen’s statement in the afternoon. The euro appreciated against the dollar to $1.1223 after strong German business sentiment data and ahead of Yellen’s comments. Emerging markets suffered another tough day with the Turkish lira and the South African rand both reaching new record lows. However the Brazilian real rebounded on possible action by the Central Bank of Brazil. The real shot up 4/5% from R$4.2478 (real per dollar) to R$3.989. US yields fell ahead of Yellen’s speech this afternoon with the ten year losing 2 basis points to 2.12% and the two year falling 1 basis point to 0.68%. Ahead of Yellen’s speech at UMass the probability for a December rate hike stands at just 40%. Similar to yields falling the dollar index lost 0.1% in spite of the Norwegian Krona falling 2.2% to NKr8.4559 after the central bank unexpectedly cut rates.

The Brazilian real appreciates the most in 7 years after the central bank indicates that it is willing to intervene to support the currency’s recent slide. After touching an all time low of R$4.2487 the real jumped to close at R$4.0438. After this significant rally the real stands at a year to date loss of 33%. The central bank said it would utilize its $317bn in foreign reserves to support the currency. As a result of this guidance yields in the country fell to reflect market expectations of the central bank’s action. 10 year yields on local debt lost 80 basis points to 16.01%. Yields on international debt fell 10 basis points to 6.13%. In spite of these moves economic, financial, and political headwinds against Brazil will continue and analysts still expect the real to face further pressure.
Janet Yellen speaks, citing low inflation as a result of low energy prices and low import prices. In spite of these pressures she still expects to raise interest rates by the end of this year. She is paying close attention to international risk and the possible effects on US economic prospects, although she still says this poses no significant effects on the interest rate trajectory. Guidance is still subject to change in light of additional economic surprises. Yellen still expects to raise before inflation actually reaches the 2% target, explaining that it is better to start early and be gradual rather than start late and shock markets with a steeper trajectory.
Many emerging markets push to raise capital before interest rates increase. In this way already indebted countries are looking to further capitalize on low rates while it is still possible. Investor demand for these bonds is waning, highlighted by Pakistan’s ability to raise only $500MM at 8.25% in spite of their desire to raise $1bn. Similarly Albania, Iraq, Ghana, and Ethiopia are also looking to raise capital in the near future. $13.1bn has been raised so far this year from “frontier” economies which is significantly lower than the record amount raised last year. These countries are being hit hard by falling commodities, China’s slowdown, and rising interest rates in the US. Kurdistan had hoped to issue debt earlier this year but was unable due to these factors. Low demand this year is in contrast from last year when issues from Pakistan and Ecuador were both 3.5-4x oversubscribed. Yields have increased in these countries. Iraq 2028 bonds have increased in yield from 7.35% to 9.86%. For Ghana bonds that yield has gone up from 7.71% to 10.13%.
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Thursday September 24

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