Friday January 15

A renewed selloff in oil markets sends stocks to another large weekly loss. The S&P500 fell 2.2% to 1,880 and the Dow Jones fell 2.4% to 15,988. Today’s losses brought the S&P500 to a weekly loss of 2.2% and a 2016 YTD loss of almost 8%. The VIX rose to 27.6 and haven assets rallied as investors exited long positions leading into the long weekend. Brent oil fell 5.6% to $29.15 while WTI lose 4.9% to $29.67. Also contributing to negative sentiment today was US economic data. The producer price index missed expectations with prices falling 0.2% from the previous month compared to estimates which called for a loss of -0.1%. Retail sales also missed expectations by a slight margin falling by 0.1% compared to estimates for no change. In addition industrial production also fell 0.4% last month compared to estimates of -0.2%. All of these factors in addition to the large selloff in oil led to equity declines and investor unease. On a more positive note the daily fix was set firmly against the dollar for the sixth consecutive day. The two year Treasury yield fell 11 basis points this week, losing 5 basis points today to 0.84%. The 10 year yield lost 10 basis points over the week and was down 7 basis points to 2.03%. The German bund yield fell 5 basis points to 0.46%. Gold prices gained $11 today to $1,089 as a risk off attitude in markets was very apparent.

With market turbulence and negative sentiment at elevated levels economists and analysts are expecting that the Fed will maintain a very cautious trajectory with the pace of interest rate increases. The Fed is set to meet again in March, and although at one point analysts may have expected another 25bp hike at that meeting, now it is largely expected that interest rates will remain at the current level. Although the labor market continues to be strong, financial market volatility and increasing disinflationary headwinds cloud the Fed’s outlook. The market for Fed funds futures reflects a 35% chance of an interest rate increase at the March 15 meeting. Economic data today showing struggling retail sales and industrial production strengthens the case for leaving interest rates where they are. With inflation currently contained and facing several headwinds it seems unlikely that the Fed would feel the need to raise interest rates.

High yield bond markets continue to struggle along with oil prices considering around 20% of the high yield market is concentrated with issuers from the energy sector. As oil prices fall oil producers and suppliers face increasing financial stress and become less likely to meet their obligations. Bonds from companies such as WPX energy and Oasis Petroleum indicate the struggles facing these types of companies. Bonds from WPX and Oasis fell 12% along yesterday and are currently trading at 53 cents and 65 cents on the dollar. With oil prices now below $30 these companies face tighter margins as they are able to bring in less revenue and production costs remain high. There has been little rebound in this sector since last month when energy bonds sold off into an illiquid environment following the closeure of Third Avenue’s credit fund. In the high yield market consumer facing issuers are down only 0.4% this year and communications companies are down 0.7% year to date. On the other hand oil names are down 4%. Similarly the credit spread between energy sector junk bonds and US Treasuries hit 14% this week which is the highest since the financial crisis in 2008.

Rating agency S&P downgraded Poland’s credit rating from A- to BBB+ and as a result the Polish zloty fell. This was an unexpected move by S&P however the country still maintains an investment grade rating. The currency fell 2% to 4.48 zloty per euro. S&P’s decision was made after the Law and Justice Party took efforts and passed legislation to strengthen their influence and weaken the power of independence and functioning of the courts and the media. As a result of the increase in political risk the rating outlook will remain negative. The ruling party has promoted higher welfare spending which will lead to a projected government deficit this year of 2.8% (considered safe in by EU standards). The Polish economy remains strong and expected to grow 3.3% this year. Fitch maintains an A- rating with a stable outlook, and Moody’s rates Poland with an A2 rating and stable outlook.

Friday January 15

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