US stocks rise after strong economic data to start March off in positive territory. The S&P500 rose 2.4% to 1,978 and the Dow Jones rose 2.1% to 16,865. The ISM manufacturing report came in higher than consensus, and while still indicating contraction in the sector, investors drew confidence from an improving new orders component. The VIX fell below 18 for the lowest close of this year. Economic data in China continued to disappoint however the Shanghai Composite rose in the aftermath of yesterday’s cut to the reserve requirement. The two year Treasury yield rose 6 basis points to 0.85% and the ten year rose 9 basis points to 1.83% after the strong economic data. The dollar was flat against the euro at $1.0869, and the dollar gained 1% against the yen to Y113.82. Brent prices rose 0.7% to $36.81 and WTI gained 1.8% to $34.34.
Exxon Mobil is testing the bond markets with a large $12bn issue of new bonds. Falling oil prices have very negatively affected bond prices and credit ratings for companies with exposure to the oil sector. However Exxon Mobil has been able to maintain a perfect AAA credit rating in spite of lower oil prices. Other companies who issued corporate bonds yesterday include Hyatt and SunTrust. In spite of Exxon’s perfect rating spreads have still widened compared to last year. The 10 year bonds that were issued yesterday sold at +130 compared to 10 year bonds issued last year by Exxon that sold at +58. The issuance could be an attempt by Exxon to raise funds before a possible downgrade by rating agencies. S&P has Exxon’s rating on review and Moody’s assigns a negative outlook to the company’s credit.
Bill Dudley, president of the New York Fed raises concerns about risks to the US economy which he believes are rising. In particular Dudley cited falling inflation expectations and trouble in emerging markets. Very low inflation expectations are troubling considering expectations play a large part into what inflation actually turns out to be. However some analysts have noted that current inflation expectations are pricing in further steep drops in oil all the way down to zero, which is in direct conflict with what oil futures markets are showing. Dudley’s concerns have yet to alter his growth outlook, however his statement comes after Lael Brainard a potential for global shocks to negatively affect US prospects. While in the months leading up to the initial rate hike the Fed cited risks to the outlook as balanced, Dudley now believes that they may be shifting towards the downside. This could mean that the Fed may choose to wait and see how global events will affect the US economy before additional rate increases.
BlackRock issues a warning regarding the potential negative effects of a Brexit. A report published by BlackRock suggests that equities, the British pound, and real estate investments in London and the UK in general could come under pressure if the UK votes to leave the EU on June 23. As far as the risk reward of a Brexit, analysts believe that the UK risks much more than it may gain by leaving the EU. Additionally regardless of the outcome of the referendum, it is expected that the lack of unity after the vote within the UK may create political uncertainty in the country. As a result BlackRock expects increasing volatility in pound and euro assets leading up to the vote in June. Equities, especially banking stocks in the UK would come under pressure in the event of a Brexit. Additionally the commercial and corporate property market may decline since many companies are located to London in part due to its easy access to the EU.