Wednesday January 13

Stock prices resume downward slide along with oil prices. The S&P500 fell 2.5% to 1,890 and the Dow Jones fell 2.2% to 16,151. Today’s losses market the biggest daily decline since September for the S&P500. Stocks started out the day with modest gains after investors drew cautiously positive sentiment from trade data out of China as well as a stable renminbi. Data out of China showed that exports increased 2.3% from the previous year in December compared to estimates which called for a decline. In addition imports fell by less than expected and oil imports rose. However this sentiment was reversed as oil prices fell dramatically due to overarching themes in the market. Brent oil fell 1.8% to $30.31 after initially touching $29.96. Small cap stocks have fallen 22% since June, officially entering a bear market. At this rate it’s possible that large caps may follow suit. In accordance with today’s losses the VIX rose to 25. The 10 year Treasury yield fell 3 basis points to 2.07%. The euro rose less than 0.1% against the dollar to $1.0886%.

In spite of positive economic data out of China falling oil prices continued to drive headlines today. Brent oil touched the $20 range for the first time since 2003 just one day after WTI touched the same level. Bullish sentiment out of China was offset by data out of the US that showed that inventories reached a new high with supply levels rising by ten million barrels. Much of the increase was due to refined products which is an indication of consumers increasing oil demand due to lower prices. If this demand stays constant or increases it may lead to a modest support to prices, however if demand weans later in the year oil prices may remain depressed. Data also showed that stockpiles in a key storage hub rose to a record level as well, and a separate report showed that production rose in the past week. All of these factors and reports resulted in a further negative outlook for oil prices which contributed to the selloff in equity markets. The data was strong enough to offset data out of China that showed that imports of crude oil increased 9.3% from the previous year.

Treasury yields fall as a ten year auction attracts high demand due to investors seeking haven assets. Demand indicators were strong at a ten year auction, with indirect bidding increasing to 71%. Indirect bidding is an indication of foreign demand for Treasuries. This high figure may assuage concerns that foreign investors such as China and other developing economies are reducing their Treasury inventories in order to defend their currencies. International investors are attracted to Treasuries in the current environment due to the relative stability of the United States economy relative to the rest of the world. Global uncertainty has therefore pushed many investors into Treasuries and sending yields downwards even as the Fed begins a tightening cycle. In response to indications that there is large demand for Treasuries, asset managers who were short Treasury futures (a large amount) have reversed some of their bets. As of November investors were net short $16bn in 10 year Treasury bonds however now that figure has reversed to a net long of $1.8bn. The continuation of the risk off attitude and flight to haven assets will increase net long positions.

Demand for corporate bonds is also high in spite of global economic and market turmoil. This is indicated by an issuance by AB InBev which received $110bn in bids for an offering of $46bn. AB InBev is a highly rated investment grade company, and it makes sense that investors want exposure to such a credit in the current environment. The offering received a record amount of bids even after the size of the offering increased to $46bn from $25bn. For analysts who have been calling for the end of the credit cycle and a declining bond market, this is a sign that investor demand for quality bonds is still very much at a healthy level. It’s possible that the issuance received such high levels of demand because market turbulence has pushed other issuers and deals back on the calendar. The AB InBev 10 year bond issued today priced at +160 with a yield of 3.69%. The company also issued 3, 5, 7, 20, and 30 year bonds at both fixed and floating rates. The issuer is rated A2 by Moody’s indicating a high investment grade rating.

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Wednesday January 13

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