Friday February 12

Stocks rise to finish off a turbulent weak. The S&P500 and the Dow Jones both gained 2% rising to 1,864 and 15,973 respectively. Today’s gains came after strong US economic data showed that consumer spending increased in January, which shows that in spite of international turmoil the US consumer remains healthy. The week was characterized by fears regarding the health of the financial sector. Today financial shares rebounded, in part after Jamie Dimon purchased $26.5mm of JP Morgan shares. This was seen as a vote of confidence in his company as well as the sector after valuations were driven down in recent days. In addition an oil price rebound contributed to positive sentiment. Brent prices rose 9% to $32.80 and WTI prices gained 11% to $29.02. The dollar rose against the Japanese yen as investors shifted out of haven assets. The recent appreciation of the yen is a trend to watch, as the governor of the central bank recently said that stimulus could be further expanded to counteract market forces against the yen. Gold prices, as well as prices for German bunds also fell. The yield on the 10 year Treasury rose 10 basis points to 1.75%.

Large financial institutions are tasked with restoring investor confidence over the next few weeks. The low interest rate environment and deteriorating global economic conditions took a toll on bank equity prices this week. In attempt to win back investor sentiment, Deutsche Bank bought back $5.4bn in bonds to reduce the debt load. Executives at JP Morgan, Citi, and Santander all bought shares to send a signal of confidence to markets. This could be a sign that the sector selloff is overdone as executives are seeing value in their own companies. US banks on average rose 6% today led by JP Morgan. Deutsche Bank shares rose 12%. Headwinds to banks year to date have included China’s slowdown, falling oil prices, the global economic downturn, as well as low interest rates.

Gold prices have been a large beneficiary of uncertain and turbulent market conditions, as well as low interest rates. Low or negative interest rates make holding gold more attractive on a relative basis. Gold prices are known to rise when interest rates are either flat or falling, and in periods of uncertainty. The current market environment is characterized by all of those conditions. As a result gold prices have risen 18% year to date. Negative rates are currently present in the Eurozone, Sweden, Japan, and Switzerland, among others. As central banks lose credibility, the ability to guide markets, and the ability to restore investors sentiment, investors are increasingly flocking to gold as an alternative. Shares of gold mining companies are also rising in price along with gold. Speculative interest in the metal points to bullish sentiment going forward. The recent fall in the US dollar is also a positive development for gold prices.

Current market conditions are not good for high yield bonds in the United States nor the Eurozone. Investors are shifting out of high yield and into government bonds, resulting in wider spreads. From a total return perspective, so far the start of 2016 has been worse for the high yield market than the start of 2008. Bonds rated BB+ and below have lost 5% year to date in the United States. In Europe this number is 4.7%. $20bn has been pulled out of high yield funds in recent weeks, and by contrast $15bn has flowed into funds that follow Treasury securities. New issuers are skeptical to enter the market in these conditions since they would likely receive unfavorable pricing. Default rates are also expected to increase which does not bode well for the high yield market. Within high yield, lowest rates companies have been the worst impacted as risk aversion is clear. CCC in the US is down 15% over the last three months. New buyers are pricing in lower quality and lower liquidity, which is leading to a downward spiral for high yield bonds.

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Friday February 12

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