Thursday January 7

Stocks fall as turmoil in China continues to weigh on global markets. The S&P500 fell 2.4% to 1,943 and the Dow Jones fell 2.3% to 16,514. The PBoC today lowered the daily fix by 0.51% for the eight consecutive day of weakening, which could prompt further devaulations from neighboring countries. Circuit breakers in Chinese markets were triggered after 7% losses just minutes after markets opened. Later, China announced that they will end the use of circuit breakers. It is possible that this technology makes selloffs worse as investors rush to the exits. In the US the VIX jumped to 24.53. Oil and industrial metals prices fell to reflect weakening demand prospects in China. Gold prices rose as investors sought haven assets, and the metal is up 4% since the start of the year. The dollar fell against peers. The Japanese yen rose 0.8% to Y117.55, the Swiss franc rose 1.4% to SFr0.9925 and the euro gained 1.5% to $1.0938. The US 10 year Treasury fell 3 basis points to 2.15% after earlier touching 2.12%.

After the IMF accepted the yuan into its basket of reserve currencies, China prioritized weakening the currency to spur the economy. The weak currency makes Chinese products more attractive to foreigners. Investors recently have been selling renminbi in order to get out ahead of the PBoC’s strategy to gradually weaken the currency. This has caused the PBoC to enter the market as a buyer of the renminbi in order to prevent sharp slides. This tells investors that first, the government and regulators do not know how to handle the market turmoil that is evident right now and second, that the serious extent of intervention shows the extent of underlying economic problems. However traders are skeptical to short the renminbi, for fear of government intervention in the market that would quickly send the trade against them. It is expensive for the PBoC to keep intervening, which is indicated by steadily decreasing foreign reserves (although they are still high). The large spread between the offshore renminbi exchange rate and the onshore suggests further depreciation. The PBoC wants to prevent too much depreciation in order to guard against capital outflows, and a large depreciation would make it difficult for borrowers to pay dollar denominated debt.

There have been no high yield issuances since mid December both as a result of the end of year lull in market activity as well as market turmoil over the last few days. Microsemi, a semiconductor company, is expected to raise $450mm to end the 24 day draught. High yield has been struggling in recent weeks due to the risk aversion atmosphere. However certain issuances are expected this year with use of proceeds to finance LBOs. In particular Dell’s acquisition of ECM and Western Digital’s acquisition of SanDisk are expected to be financed in part with high yield debt. The near term pipeline of speculative grade debt is low however as issuers are hoping to wait out the volatility.

More social spending and stimulus may be on the menu for Brazil in 2016. High interest rates are also under attack by leaders of the ruling PT party. President Dilma Rousseff’s first term in office was market by an increase in lending to banks, lower interest rates, and a cap in energy prices to control inflation. These policies resulted in a large government deficit and led the economy to the current state. However these policies may be resumed. The PT party last year resisted attempts at fiscal austerity and signs point to a return of prior policies. Political analysts also expect Rousseff to challenge the central bank’s autonomy in order to appease the left of her party if and when the impeachment proceedings gain traction in the spring.

Thursday January 7

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