Monday December 14

Stocks rise to start the week in spite of continued volatility in oil prices and high yield credit markets. The S&P500 gained 0.5% to 2,021 while the Dow Jones added 0.6% to 17,368. Brent oil touched as low as $36.33 however finished higher at $37.92 and WTI experienced a similar dip but closed at $36.25. Continued global economic weakness as well as inventory and production reports which continue to surpass expectations are weighing heavily on prices. The problems between the oil market and what is currently happening in the high yield market are very interrelated. Asset managers such as the closing Third Avenue fund went further out on the yield curve and lower on the credit spectrum in order to reach desired yield levels. However these bonds are significantly less liquid and bonds from oil companies make up an oversized portion of this market. Therefore stresses in these two markets go hand in hand. It remains to be seen that panics in these two markets will spill over into other areas of the market. Treasury yields rose with the two year up 6 basis points to 0.96% while the ten year gained 9 basis points to 2.23% as the Fed is expected to raise interest rates on Wednesday. The dollar was firm at $1.0987 against the euro.

The selloff in high yield markets continues to develop in the aftermath of the oil selloff and the announcement that Third Avenue credit fund will close. Mutual funds and ETF are reporting heavy outflows as investors seek to minimize their exposure. Mutual funds managed by Waddel & Reed as well as Alliance Bernstein that focus on the high yield market have each fallen in excess of 7%. Equity shares of publicly traded asset managers such as BlackRock and Affiliated Managers Group have both fallen as stock investors begin to project how this selloff will effect the asset management industry going forward. In Europe CDS spreads widened to 360 basis points compared to 294 basis points a week ago which reflects that stress and risk is spreading from US markets to European markets.

There is uncertainty surrounding how the start of a Fed tightening cycle will affect emerging markets. Some analysts believe that higher interest rates are already efficiently priced into markets. This may be partially reflected through currency markets where currencies in Brazil, South Africa, Turkey, and India are down between 6 and 31% this year. However others believe that further losses and turmoil after US rates rise is inevitable. There is not much historical evidence as it relates to policy and growth divergence to suggest what might occur in markets when the Fed raises interest rates. Unexpected political and fiscal risks such as recent developments in Brazil and South Africa are also something to take into account as institutions in emerging markets may not be as stable as they are in developed countries. Emerging market private sector debt is high, especially bonds that are denominated in hard currency such as US dollars. These obligations will become more difficult to fulfill when the value of the US dollar increases.

Monday December 14

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