Thursday March 17

Stocks rise and yields continue to fall in the aftermath of the FOMC meeting. The S&P500 gained 0.7% to 2,040 and the Dow Jones added 0.9% to 17,508. The S&P500 at one point entered into positive territory for the first time this year before easing back slightly, and the Dow Jones closed in positive territory. The VIX continued its decline to 14.38 which is the lowest since early November. Todays gains come after the Fed struck a dovish tone yesterday which has driven a rally in risk assets as well as pushed yields and the dollar lower. In Europe, the central bank in Norway lowered interest rates 25 basis points to 0.50% and remains open to the possibility of further cuts. The krone fell 0.8% against the euro as a result. Some analysts expect the Norges Bank to follower the lead of Denmark and Sweden and impose negative rates. Stock indices also benefited from higher oil prices as Brent rose 3% to $41.54 and WTI rose 4.3% to cross the $40 mark for the first time all year. The US dollar index fell 1.1%. The euro rose 0.8% to $1.1316 and the yen rose 1.1% to Y111.37. The ten year Treasury yield fell 4 basis points to 1.90% and the two year fell 1 basis point to 0.87%.

The Fed’s decision to lower the dot plot was largely due to the global risks that weigh on the US economy. The Fed updated it’s interest rate guidance and lowered the dot plot to reflect a shallower pace of rate increases. This buys the Fed additional time to determine whether or not the economy is improving and inflation is picking up despite the global pressures. Lael Brainard of the Fed board of governors in particular has been advocating against rate increases as a result of the potential spillover effects of higher interest rates in the US. The US economy remains on a healthy track it appears, and were it not for these global risks it’s likely that the Fed would continue with its initial projections. First quarter GDP growth is on track for 2% annualized growth, CPI is rising, and the labor market continues to tighten.

Currencies of Asian currencies are a large beneficiary of the risk on attitude that followed the FOMC statement. The Fed is now expected to keep rates lower for longer which puts downward pressure on the dollar. The Japanese yen has risen 1.5% against the dollar since the release of the statement, which opposes the goals of the BoJ. The BoJ has been trying to weaken the currency in efforts to stimulate the economy, however the yen has rallied this year as investors have sought to hold yen as a haven asset. The Australian dollar, the Singapore dollar, the Thai baht, Malaysian ringgit, and Korean won all reached notable highs. The PBoC is also setting its currency stronger relative to the dollar, with the yuan daily fix 0.3% higher. The PBoC is trying to keep its currency firm in order to appease international investors and prevent capital outflows. Asian bond markets similarly rallied with the currency markets.

AB InBev’s 13.25bn euro issue of corporate sets a record for largest ever corporate issuance denominated in euros. The issuance amounts to $14.8bn, and it comes shortly after the ECB announced that it would start purchasing corporate bonds. This week European companies have been rushing to issue debt to capitalize on lower yields and higher demand for debt that fits the ECB’s criteria. The issuance was originally supposed to be for 9bn euro, however the size was bumped up as a result of considerable demand. The bond received 32bn euro in orders, and the proceeds will go towards the $108bn acquisition of SABMiller. This comes after an issuance from AB InBev in January for $46bn received more than $100bn in orders. This signifies that investor demand for quality credit is quite high in spite of the fears in the global economy. Today’s issuance offered bonds from four to twenty year maturities and yields averaged 1.55%.

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Thursday March 17

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