Thursday January 28

Stock prices rise along with oil prices as high correlations continue. The S&P500 gained 0.6% to 1,893 and the Dow Jones added 0.8% to 16,069. Gains in equities today were partially driven by rumors out of Opec that pressure and debate was rising among producers about production cuts. The chance of lower production and therefore higher oil prices sent oil prices higher. Brent rose as high as 8% at one point in the day to $35.84 and WTI finished up 4.4% to $33.72. Upward momentum in oil contributed to upward momentum in equities. Higher oil prices sent currencies from oil producing nations higher, as the Russian ruble gained 2.1% against the US dollar. In spite of the rumors analysts are still skeptical that they will come into fruition due to the dissension among Opec members and strong statements in the past that production would not be cut. Economic data in the US was mixed with jobless claims coming in strong, and durable goods orders disappointing. The 10 year Treasury yield fell 2 basis points to 1.99% and the US dollar index fell 0.3%. In particular the euro gained 0.5% to $1.0941 even as the ECB prepares to expand QE.

Rumors circulating about possible discussions relating to an Opec production cut sent oil prices higher today. Russia’s energy minister suggested that major oil producers around the world ought to meet next month to talk about production cuts. Countries such as Russia are highly dependent on oil prices and their fiscal budgets are strained by low oil prices. By encouraging production cuts Russia hopes to stable the market and raise prices. Immediately following the announcement prices rose as much as 7% before easing back to finish the day 4% higher. Many analysts believe that the production cut is still unlikely, as several Opec members in the past such as Nigeria and Venezuela have suggested production cuts that were rebuffed by Saudi Arabia. Saudi Arabia has suggested that it would only be amenable to production cuts if significant non-Opec producers such as Russia and Iraq concede as well. Iraq just recently for the first time suggested that it may reconsider its stance on possible production cuts, and now Russia too appears to be willing to discuss the topic.

China remains active in preventing capital outflows and a consequent depreciation of the renminbi. Most recently China has taken measures to prevent foreign companies that are operating in China from repatriating earnings, which effectively would bring money out of China. While this may serve the short term goal of preventing money from leaving the country, over the long term it could prove further detrimental as companies and investors will be less willing to invest there due to the possibility of having their capital locked up. China must find ways to support its currency without draining its foreign exchange reserves. The rate at which China has been blowing through foreign reserves over the last year and a half is unsustainable and cannot be continued over an extended period of time. Since reaching a peak of nearly $4tn in 2014 China’s foreign reserves have fallen nearly $700bn. The central bank continues to deter investors from betting against the renminbi in offshore markets through making it very expensive to short.

Market turmoil in the first few weeks of this year put many bond issuances on hold until conditions became more stable. When this pipeline does in fact hit the market it will be a test of investor’s appetite for corporate debt. Credit spreads have widened as investors have shifted out of riskier corporate debt into more secure fixed income assets such as Treasuries and highly rates bonds. When the backlog of bonds hits the market over the next few months it will test whether or not spreads will widen further or remain steady which will indicate investor sentiment and risk appetite for debt. While companies such as Morgan Stanley, Ford, Disney, John Deere, and Barclays have had notably large issuers this year, companies such as Berkshire Hathaway, Dell, and Teva will all raise capital this year to finance multibillion dollar acquisitions. Ford last month was able to issue 10 year bonds at +215 compared to +187 at which it was able to complete a 10 year issuance last year. This indicates a shift in risk tolerance among investors. Nevertheless analysts expect that the investment grade market will be resilient this year while the high yield market has more room to fall along with oil prices.

Thursday January 28

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