Tuesday January 12

Stocks rise even as oil prices reach notable lows. The S&P500 gained 0.8% to 1,938 and the Dow Jones added 0.7% to 16,516. Brent oil fell 2.2% to $30.86 and WTI at one point dipped below the $30 threshold. In spite of this development and negative impact on sentiment stock prices still rose. China kept the daily fix stable, and intervened in the offshore foreign exchange markets to eliminate the spread between the renminbi onshore and offshore rates. This spread had widened dramatically recently which is an indication of investors expectations for future depreciation as well as capital outflows. In addition China raised an overnight interest rate that will make it excessively expensive for investors to short the renminbi. While this may solve the PBoC’s problem of speculators targeting the renminbi it may further obscure market based indicators for the state of economic health in China. Haven assets such as Treasuries and bunds continued to be in favor with ivnestors. The 10 year Treasury yield fell 4 basis points to 2.11% and the yield on the equivalent maturity bund fell 1 basis point to 0.53%. Elsewhere in Europe, Spanish yields continued to rise after Catalonia elected a new President which increases the chances of the region’s independence. The dollar rose 0.3% against the yen to Y117.9530, 0.2% against the euro to $1.0837, and 0.7% against the British pound to $1.4430.

The continual plummet in oil prices has sent investors to haven assets, which is indicated by the steady decline in US Treasury yields. The ten year yield fell to its lowest today at 2.10% which is the lowest level since October 28. This comes after oil prices touched the lowest level since 2003. So far in 2016 WTI oil prices have fallen by 17.8%. Oil prices have fallen as supply levels (even from US producers) have remained steady and inventories remain at record highs. Concerns about China are also a large factor. This broad selloff in the energy market has concerned investors for two reasons. First, the reasons behind the oil selloff particularly a decrease in global energy demand do not bode well for the global economy. Second, lower oil prices will put great stress on US markets as energy companies and other firms with exposure to the sector make up a large portion of US equities. These concerns have pushed investors into haven assets such as Treasuries therefore depressing yields. Yields have fallen to October’s levels even though the Fed last month projected four interest rate increases in 2016. If this forecast does in fact come true, then yields may remain low due to the global pressures and stresses evident in the financial system. Upward pressure on yields comes from China selling foreign Treasury reserves to defend the renminbi, as well as similar actions from other emerging markets wishing to defend their currencies from depreciation.

According to rating agency S&P, global credit conditions particularly the ability for companies to repay debt are decreasing. The ratio of companies at risk of a rating downgrade compared to companies expected to be upgraded is at a notable high. Only 6% of the companies S&P monitors are on watch for positive improvements to credit ratings, while 17% are on watch for negative changes to ratings. This is the biggest discrepancy between these two numbers since 2008. This comes as commodity companies in particular with exposure to commodity market prices, such as drillers and exploration companies are a source of the problem. What remains to be seen is if and how deteriorating credit conditions for these firms will spread to other sectors.

Argentina’s President is attempting to resolve outstanding disputes with creditors which would allow the country long awaited access to capital markets. In the aftermath of Argentina’s $100bn default in 2001 (which up until Greece’s default had been the largest in history) many bondholders sued in US courts on the grounds that they were owed full repayment of the bonds they owned as opposed to receive a haircut. The bonds were issued in the United States and are therefore subject to US law. Argentina is yet to repay these creditors and therefore has been unable to raise funds from international markets. This access would help Argentina to solve some of the problems that have been plaguing its economy for years. For example resolving this dispute would lower borrowing costs for the government and therefore companies wishing to borrow funds. Such a decision to negotiate with creditor is a risk to the political reputation of the President and leading party as the country’s constituents see US hedge funds demanding full repayment as vultures seeking to capitalize on the country’s plights. In 2005 93% of the bondholders agreed to accept a haircut on what amounted to 33 cents on the dollar. 7% of the bondholders which include some prominent hedge funds such as Elliott Management bought bonds very cheaply and are now demanding full repayment.

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Tuesday January 12

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