Thursday October 29

Stocks fall marginally in the aftermath of the FOMC statement. The S&P500 fell fractionally to 2,089 and the Dow Jones lost 0.1% to 17,775. Treasury yields continued to increase as traders push forward tightening expectations to reflect the Fed’s updated guidance. The two notable takeaways from the Fed’s statement were the omission of reference to global risks and the addition to the possibility of rates rising at the next meeting. As a result the economic data as it relates to employment and inflation will become even more meaningful. The Fed’s statement provides more clarity to investors about their intentions and focus over the next few months. The two year Treasury yield rose 2 basis points to 0.73% while the ten year yield rose 8 basis points to 2.17%. Similarly the German bund yield rose 8 basis points to 0.53%. The dollar gave back some of yesterdays gains but still remains at an elevated level relative to where it has traded recently. The euro gained 0.4% against the dollar to $1.0964 while the yen closed at Y121.07 ahead of the BoJ’s announcement tomorrow. The New Zealand Dollar fell to US$0.6691 after the Reserve Bank of New Zealand held interest rates but maintained accomodative guidance.
US economic growth missed expectations. Data today showed that the economy grew 1.5% at an annualized rate in the third quarter. This shows that growth stalled over the last three months compared to the second quarter when the economy expanded at a 3.9% annualized rate. One main headwind to growth was a decrease in private inventories which may suggest that companies are not holding as much inventory as they expect that future demand may not be quite as strong as the past. This reading continues the trend of mixed economic data that does not provide the Fed with clear direction in either way. One bright spot in today’s report was consumer spending which grew 3.2% in the quarter.
Rating agency S&P changed the method by which it values hybrid bonds. Essentially this decision affects the pricing and valuation of $23.3bn of outstanding hybrid debt, and markets responded accordingly. In the past these products have been considered to be half debt and half equity when calculating credit ratios in the past, however now they will be considered entirely debt. This came as a surprise to markets as this was not an expected move. Hybrid bond issuance has become popular in recent years. $45bn was raised last year and $26bn has been raised so far this year as issuers are trying to lock in low interest rates. Essentially this change increases the leverage of 14 affected issuers that no longer qualify for having their hybrids classify as 50/50 debt/ equity. S&P says that no company will be downgraded directly as a result of the change however they may be forced to spend less if they wish to maintain their current ratings.
As a result of economic troubles in Brazil investors with a heavy risk appetite are entering the distressed market. Bankruptcy filings have increased and banks are selling off non-performing loans. NPL sales are expected to total R$25bn this year compared to R$15bn last year. These sales represent portfolios from international banks such as Citi and Santander on top of Brazilian banks. According to the financial times portfolios are selling for 1.5-8% off of face value.
Thursday October 29

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