Wednesday January 6

Stocks fall as risk aversion in markets continues. The S&P500 fell 1.3% to 1,990 and the Dow Jones lost 1.5% to 16,907. Oil prices continue to fall, China continues to be a concern, and geopolitical conflict with North Korea all weighed on sentiment today. As a result haven assets rally. The FOMC minutes showed that the Fed was relatively dovish ahead of the rate rise in December. Investors drew concern from China, where services sector data disappointed expectations. With the manufacturing sector contracting the services sector is expected to expand and make up for the decrease in production, however this data point casts that expectation into doubt. The renminbi weakened against the dollar, and the spread between the onshore rate and the offshore rate also widened. This is indicative of expectations for further weakening of the daily fix and capital outflows. Gold prices rose to a two month high, and the German bund yield lost 4 basis points to 0.51%. The ten year Treasury yield fell 7 basis points to 2.18% and the two year yield fell 4 basis points to 0.98%. The dollar fell 0.4% against the euro to $1.0790 and 0.5% against the Japanese yen 0.5% to Y118.42. Oil prices slid heavily with Brent losing 6% to $34.23 and WTI falling 5.7% to $33.92.

Minutes from the December Fed meeting show that Fed members were concerned of low inflation when discussing raising interest rates. Most members expect economic factors to contribute to higher inflation this year, which is why raising rates were warranted last month. Nevertheless it was a close decision, and the minutes showed an emphasis on taking a “cautious approach” when raising rates this year. There was no indication that members are in a hurry for a subsequent rate hike. It appears that the trajectory will be dictated by economic as well as market conditions. Fed members expressed hesitation as some wanted more evidence that inflation was definitely headed towards 2%, the inability to reverse course if needed, as well as the effects of low oil prices on inflation.

Debt sales resume after quiet activity at the end of the calendar year. Disney and Ford both raised money today through the capital markets. Both issuances were met with strong demand in spite of the recent selloffs in equities and high yield bonds. In spite of market turmoil highly rated bonds have held up relatively well over the last month. In particular Wells Fargo favors debt from consumer facing companies as well as banks. Ford today issued $2.75bn in 10 year bonds priced at 4.39% or +221. Disney raised $3bn in 10 year bonds priced at 3.05% or +87. Barclays expects 2016 investment grade issuance to be $1.34tn which is roughly in line with 2015 totals. The bank also expects high yield issuance to be $290bn this year which is a 15% increase from last year’s totals. Investment grade debt held up well since the selloff in high yield markets last month. During that time high yield indices fell 12% and investment grade lost only 2.5%. On a large visa issuance which was offered to the market last month, spreads have since tightened from +97 to +83.

Political risk will be a key theme in Brazil in 2016. Impeachment proceedings for President Dilma Rousseff are expected to begin in February or March. The economy is also closely tied to China’s fate, which puts the country in a precarious spot. Stock and currency markets have reflected the negative impacts. The bovespa last year lost 9% in local terms, and has fallen to start 2016. The country is expected to experience a 2.95% contraction this year, and the government deficit is currently running at 10% of GDP. Not helping matters is the expectation that new finance minister Nelson Barbosa will implement additional stimulus measures. The central bank is also starting to come under attack by Congress for its use of high interest rates to reign in inflation which is currently running over 10%. This could threaten the independence of the central bank, as well as the policies that are intended to control inflation.

Wednesday January 6

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