Tuesday December 8

Stocks fall as energy prices continue to weigh on sentiment, The S&P500 fell 0.7% to 2,063 while the Dow Jones fell 0.9% to 17,568. Today’s losses bring the S&P500 negative year to date. Brent oil fell to $40 and WTI at one point was down as much as 2.7% however those losses eventually narrowed to 0.4%. Unsurprisingly lower oil prices led to depreciating currencies in countries such as Canada, Norway, and Russia. The renewed selloff today in the aftermath of Opec’s Friday meeting was driven by economic data which showed that imports continue to be weaker than expected. This is indicative of the country’s falling demand for raw goods that are used in production and manufacturing. Oil companies such as Anglo American and Kinder Morgan in the energy sector cut dividends. The US dollar fell while gold rallied slightly. The euro gained 0.5% to $1.0892 while the yen added 0.4% to Y122.93. The two year Treasury remained flat at 0.94% while the ten year added 1 basis point to 2.24%.

The repercussions of negative interest rates around the world remain to be fully understood. This relatively recent phenomenon has originated from unconventional monetary policy and clashes with some of the traditional principals of finance. Last week the ECB cut its deposit rate from -0.2% to -0.3% which prompted further cuts into negative territory from countries such as Denmark, Sweden, and Switzerland. These countries are seen as safe havens and have to protect their currencies and markets from heavy inflows due to lower rates in the Eurozone. So far negative rates have been successful in putting downward pressure on currencies however inflation and GDP growth remain to be elusive. It remains to be seen how these unconventional policies will be unwound and what the long term repercussions are. Some possible unintended consequences that have been brought up are hoarding of cash, asset price bubbles, and high levels of inflation.

Markets are positioning themselves for rising US interest rates by shorting US Treasuries. Investors are net short $26.6bn in five year Treasuries which is the most since CFTC data began to be collected in 1993. The five year Treasury yield has been rising and currently stands at 1.68%. At the same time the yield curve has been flattening as short term rates are expected to rise faster than long term rates as is usual to happen during periods of monetary tightening. Fed funds futures now price in an 80% chance of tightening next week, which although elevated, still seems low given the strength of economic data and statements made by FOMC members recently.

Bonds from commodity companies are suffering heavily as a result of the recent price rout. The high yield bond market in general is now heavily concentrated in energy companies that many believe are set to default if prices continue falling. A bond from Chesapeake Energy is trading at just 32.8 cents on the dollar, while bonds from Oasis Petroleum and EP Energy have fallen as well although still trade somewhat closer to par. Companies that own oil pipelines have also faced pressure, which indicates that markets may be expecting volumes of oil that flow through pipes will decrease. Current high rates for energy companies will make it difficult for companies to raise additional capital and refinance existing debt through the public markets. For example American Energy Permian Basin looked to raise $530mm last month however the size of the offering was reduced when the market priced in a yield of 13%.

Tuesday December 8

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