Monday December 21

Stocks rise to start the week in the aftermath of last week’s losses. The S&P500 rose 0.8% to 2,021 and the Dow Jones gained 0.7% to 17,251. The VIX fell below 20 today which indicates stress and fear in the markets is subsiding, although oil prices continue to slide. Brent today touched $36.04 which is the lowest level since 2004. WTI similarly touched $33.98. Attention in Europe shifted in Spain following an election outcome which raised short term political uncertainty. The outcome shows that nontraditional political parties in Europe are gaining traction, which could mean anti austerity and anti euro sentiment in the future. As a result Spanish bond yields rose and stocks fell. Elsewhere in the eurozone the bund yield only rose 1 basis point to 0.56%. The US ten year Treasury yield remained flat at 2.20%. The dollar lost ground today with the dollar index losing 0.3% and the euro rising 0.5% to $1.0918. Consequently gold prices rose.

The PBoC strengthened the renminbi for the first time in ten days through raising the daily fix against the dollar. The fix was increased by 0.09% to 6.4753 renminbi per dollar. It is an insignificant amount, and it is possible that the bank only raised it to avoid the sentiment and signal of 11 days of consecutive weakening. The fix has been lowered 1.5% over the past two weeks alone. The PBoC may be trying to avoid extensive shorting of the renminbi, as well as unfavorable capital outflows that come as a result of one way expectations of the fix. The renminbi has fallen for seven straight weeks and is down 5.87% since August when the PBoC announced a more market based fix.

The ruling party in Spain doesn’t win enough voter support that would have allowed them to form its own government. This opens up the possibility for a coalition government and as a result political uncertainty increases in the country. The Spanish ten year yield rose 14 basis points to 1.824% to reflect these higher risks. Stocks, especially financial company shares, fell with the Spanish Ibex down 2.5%. The country has consistently high unemployment rates as well as high levels of public debt, in spite of a notable economic recovery this year. An anti austerity party is likely to have a spot in the new coalition government.

The new Brazilian finance minister Nelson Barbosa is to replace the outgoing Joaquim Levy who resigned/ was removed by Dilma Rousseff on Friday. Markets reacted negatively to this replacement with the real down 1.57% against the dollar to R$4.0129. The country’s finances are dismal with the primary deficit currently at 10% of GDP. GDP for 2015 is expected to show 3.6% contraction while 2.8% contraction is expected in 2016. Credibility in the finance department are low as the country has repeatedly missed its own fiscal estimates and has revised downward many relevant numbers. Joaquim Levy had been vocal about his belief that austerity measures were needed to restore fiscal health. He was trying to implement spending cuts and higher taxes to improve the deficit. There is an expectation that Barbosa will be less inclined to impose austerity which is why markets reacted negatively to the replacement. Barbosa said he is expecting a primary surplus of 0.5% of GDP next year. However credibility in these estimates are low considering it is unlikely that he is able to push any meaningful reforms through congress which is currently deadlocked.

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Monday December 21

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