Stocks fall after more negative news out of China and a renewed selloff in biotech. The S&P500 fell 2.6% to 1,881 and the Dow Jones fell 1.9% to 16,001. Today’s losses were widespread across sectors. Companies with exposure to commodities and mining fell after data out of China showed that industrial profits fell 8.8% over the past year. This is yet another indicator of just how bad the slowdown in China is, and markets continue to price in an even more negative outlook. Biotech continues to slide after Hilary Clinton’s pledge to counteract “price gauging” in the sector. Also contributing to downward pressures was William Dudley saying that rates were likely to raise in 2015. It’s important to note that Dudley is a voting member of the FOMC who is typically dovish. Nevertheless yields fall with the ten year down 7 basis points to 2.09% as investors look to hold quality investments amid global uncertainty. This also reflects markets continuing to underprice the Fed. Similarly haven currencies also appreciate with the swiss franc and the Japanese yen experiencing inflows as equity indexes around the world fall.
There is weak investor demand for corporate bond issuance as a result of the global turmoil. Santander recently expected to raise $1bn however they canceled the offering due to lack of demand. Other cancellations today were all from investment grade companies. This highlights a change as previously demand for these bonds was not lacking at all. According to one analyst investment grade markets are “schizophernic.” Corporate issuance is up 15% from one year ago however now the negative effects of the global economy are becoming apparent. Credit spreads are widening. Last week several high yield issuances sold at higher yields than expected as investors continue to price in increasing strain on companies.
William Dudley says that he Fed is on track to raise in either October or December. Dudley is a dovish member of the FOMC and is currently the President of the New York Fed. Over the past year or so it was clear that many hawkish statements that were being made came from members of the FOMC who were typically hawkish. Now the group of members who is saying that the Fed should raise rates includes dovish members too including Dennis Lockhart, John Williams, Stanley Fischer, and now William Dudley. Dudley says that if the economy stays course then there is a “strong case” for tightening. He also voices similar concerns to other members of the Fed by mentioning price “imbalances” in some markets. He conveys that the domestic economy is strong, however there are some sources of concern on the international landscape. CPI is up just 0.3% in August from the previous year with core up 1.3%. This continues to trail the target of 2%.