Wednesday December 9

Stocks continue to fall for the third consecutive day this week. The S&P500 fell 0.8% to 2,047 while the Dow Jones lost 0.4% to 17,492. Although the energy sector was up today commodity prices continued to weigh on sentiment as Brent crude at one dropped below $40. Expectations that the Fed is likely to raise interest rates next week are also making markets anxious. According to a report published by BNY Mellon when the Fed raises rates at a slow pace equities typically return 11% the following year, however when rates rise at a faster pace the return falls negative to -3%. In spite of tightening expectations the US dollar eased back 1.1% to 97.368. The euro gained against the dollar by 1.2% to $1.102 and the yen also gained 1.2% to Y121.47. The British pound similarly advanced to $1.5181. The dollar’s decline over the past few days is favorable for the Fed, which is paying close attention to the dollar’s appreciation as a result of potential effects on inflation. These seemingly counter intuitive movements in the dollar particularly against the euro leading up to Fed tightening may be a result of investors adjusting their positions and exposure in the aftermath of the ECB’s decision. The two year yield fell 1 basis point to 0.93% while the ten year yield fell 2 basis points to 2.22%.

Since the ECB last week did not deliver as much stimulus as was expected by markets banks have been revising their forecasts no the euro/ dollar exchange rate. Many banks had previously expected parity or lower between this pair however now those estimates are being changed to reflect less easing than expected from the ECB. The consensus is that the exchange rate will be $1.05 at the end of the next year, and some banks that were expecting the rate to fall significantly below $1 are changing those views. The pace of the divergence will ultimately be the key driver between the euro and the dollar and with Draghi easing less than expected and Yellen insisting that the rate trajectory will be shallow, the pace of divergence seems like it will be quite slow. After Goldman Sachs revised its estimate the only bank that expects the exchange rate to be below $1 at the end of 2016 is Barclays.

Republicans in US Congress propose a plan on how to handle Puerto Rico’s current struggles. The plan presented is very different from Obama’s proposal and provides Puerto Rico with significantly less assistance than what Obama proposed. Republicans want to cut employee payroll taxes and extend $3bn in financing to the island. By contrast Obama’s plan would have provided Puerto Rico with access to US Bankruptcy courts which would be very helpful in a potential restructuring. The Republican’s plan would put in place a chief financial officer who would establish and enforce strict and sustainable budget targets for the country, and the plan insisted that it is in no way a bailout. By providing the country with $3bn in financing and establishing sustainable budget targets for the future the plan hopes to provide liquidity in the short term for the country. It remains to be seen whether or not either of these plans will be enough to prevent Puerto Rico from a default given the $72bn debt pile.

Visa issued a $16bn bond offering today which was met with strong demand from markets. This represents the fourth largest issuance this year and the use of proceeds will be to finance the 21.2bn euro acquisition of a former subsidiary. The timing of this move comes ahead of when the Fed is expected to raise interest rates. In this way Visa was able to tap the capital markets before yields and borrowing costs increased. The ten year bonds priced with a yield of 3.193% or +93 and further out on the curve the thirty year bonds traded at an even more narrow spread. Visa’s credit is A1 rated. Very large deals such as these have been commonplace this year as companies such as Actavis, AT&T, and AbbVie have used low interest rates to finance acquisitions.

Wednesday December 9

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