Thursday February 25

Stock prices once again benefit as a result of an increase in oil prices. The S&P500 gained 1.1% to 1,951 and the Dow Jones rose 1.3% to 16,697. It is also important to note that the S&P500 broke the 50 day moving average for the first time in 2016 which is seen by many to be a bullish technical indicator. Accordingly the VIX also dropped below 20. Stocks in Europe and Japan also rose in spite of a 6.4% decline for the Shanghai composite. It appears that the correlation between the Shanghai composite and other global stock indices is breaking after a strong relationship earlier in the year. Oil prices continued to rally with Brent rising 2.6% to $35.29 and WTI rising 2.8% to $33.05. In spite of rising equities, haven assets such as gold and Treasuries rose. The 10 year Treasury yield fell four basis points to 1.71%. Yields fell even in spite of strong durable goods orders that showed that orders rose 4.9% in January, and non-defense capital goods orders (i.e. business investment) rose 3.9% in that time which was stronger than expected. The US dollar rose 0.6% the Japanese yen to Y112.83 and the British pound gained 0.3% to $1.3968.

Even as the Fed has signaled rising interest rates this year yields continue to fall in the US and around the world in general. As a result investors have responded to lower yields by shifting out on the yield curve, demanding longer term debt. This indicates a willingness to lock up their principal for longer in search of higher yield as opposed to looking for shorter term alternatives such as corporate credit. This could indicate poor investor confidence relating to the strength of the credit market and economic fundamentals. To indicate the demand for long term bonds, the Japanese 40 year bond now yields less than 1%. A recent Japanese government bond issue with a 1.13% yield was three times oversubscribed, indicating very high demand in spite of low yields. The total amount of global sovereign bonds that yield less than 1% according to a Bank of America index is approaching 70%.

Goldman Sachs underwrote $2bn in bonds to finance Vista Equity’s acquisition of Solera, however the bank is now struggling to sell the bonds given current market conditions. High yield bond issuance has fallen 70% compared to this point last year and yields have increased as investors are less willing to take on risk. Moody’s rates the bonds Caa1 which is equivalent to S&P’s CCC+ rating. The bonds were originally supposed to carry a yield of around 10% however that has been bumped up to 11% and only half of the issue has been accounted for. As a result the sale has been pushed back to either tomorrow or possibly next week. As a result Goldman may be forced to hold a portion of the deal on its balance sheet, and hold increasing capital against it which puts pressure on profitability.

In spite of the many pressures facing Venezuela, and expectations that a default from the country is imminent, the country appears as if it is set to make a $1.5bn debt payment to foreign investors. The country’s economy is expected to contract 8% this year, is very heavily dependent on oil, has scant foreign reserves, and shortages of essential goods are evident. However Venezuela has insisted that it is committed to paying foreign investors. in spite of these woes. Venezuela relies almost exclusively on PdVSA the state owned oil company for inflows of foreign currency. As a result the country fears that a sovereign default could result in a breakup and sale of PdVSA assets which would cripple the Venezuelan economy for years to come. Venezuela has therefore resorted to cutbacks in essential goods such as food and medicine in order to pay investors, which is seen as an issue by some members of the socialist party (currently in power). The country faces many headwinds as inflation is over 100% and the government has resorted to rationing drinking water and power. On top of all of these problems, it has $120bn of foreign debt outstanding which is widely held by emerging market funds.

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Thursday February 25

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