Wednesday March 2

Stocks rise for the second consecutive day once again after positive economic data and rising oil prices. The S&P500 rose 0.4% to 1,986 and the Dow Jones rose 0.2% to 16,899. The VIX continued its downward momentum, closing below 17. Brent crude oil rose 0.3% to $36.93 and WTI gained 1.4% to $34.87. Also contributing to positive sentiment was the ADP private payroll report for February, which was significantly higher than expectations. This paves the way for a non-farm payrolls report on Friday that may surprise to the upside. Markets were able to shrug off a statement by Moody’s that suggested the rating agency may downgrade China’s credit rating in the future. Nevertheless the Shanghai Composite rose 4.2% as additional monetary easing from the PBoC continues to support asset prices. The 10 year US Treasury yield rose 1 basis point to 1.84% and the dollar was flat against the euro at $1.0869 and down 0.5% against the yen at Y113.36.

The Canadian dollar has been depreciating against the US dollar in recent months which may materialize to be a problem for the US economic recovery. Canada is a close trade partner with the United States and the stronger dollar makes American goods more expensive for Canadians. This puts downward pressure on the trade deficit of the United States. Less Canadians are shopping in the United States, and Canadian companies that do business in the US are reconsidering their options as demand for American goods is falling. In 3Q 2015 the loonie fell 17% against the dollar, resulting in a 15.5% decline in the value of US exports to Canada. In particular companies such as Molson Coors and Deer have been negatively impacted, as well as smaller businesses along the border.

John Williams of the San Francisco Fed issues a strong outlook for the US economy. These comments come shortly after concerns were raised by other members of the FOMC such as Lael Brainard and Bill Dudley about rising risks to the outlook. Williams cites how the US economy has been resilient in spite of a stronger dollar and a weaker global economy. According to Williams the domestic economy is strong and healthy, and growing demand will offset global weakness. Williams believes that with downward pressure on unemployment, inflationary pressures will result to rise and as a result gradual interest rate hikes will be necessary. He has doubts over the concerns that China’s economic issues will have significant spillover into the US. Williams is not a voting member of the FOMC this year.

Instability in the corporate bond market is reflective of broader economic and market turmoil. While the investment grade market has been resilient, the high yield market has shown signs of pressure. Investment grade issuance is actually up year to date from this time last year, as companies such as Exxon, Apple, and Anheuser Busch have led the way with multi billion dollar issuances. However more speculative grade issuers who have accessed capital markets have been forced to scale back the size of deals which have attracted higher borrowing costs, in light of higher risks. This reflects tightening financial conditions for that one corner of the market. In spite of these struggles the leading high yield ETF yesterday entered positive territory for the first time all year as investors have shifted more towards risk assets in recent weeks. Some asset managers are finding value by strategically picking investments in the high yield market, which had been beaten down 6.2% at the start of the year. One strategy that has turned popular is investing in short term high yield debt. Given that there is a great deal of perceived uncertainty regarding the US economic outlook, investors are choosing to avoid making a directional play on the long term economy through the high yield market, and instead opting for shorter maturity high yield bonds.

Wednesday March 2

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