Monday March 28

Stocks rise marginally to start the week. The S&P500 and the Dow Jones both rose 0.1% to 2,037 and 17,535 respectively. Stock volumes were light as markets remained quiet coming off of the long weekend. Economic data in the US today showed that the core PCE price index rose 1.7% from the previous year in February. This was slightly lower than estimated and was in line with the January level. As a result of this muted inflation reading the dollar fell as investors expected lower rates for longer. The dollar index fell 0.4% as the dollar lost 0.3% against the euro to $1.12. Janet Yellen is scheduled to make a speech tomorrow in New York which will provide more direction on future FOMC policy. Oil prices fell slightly with WTI falling to $39.39 and Brent falling to $40.27. Despite easing back somewhat over the last week oil prices have remained firm around the $40 level. Treasury rates fell with the ten year falling 2 basis points to 1.88%. The two year fell one basis point to 0.87%.

Investors expect volatility to pick up in equity markets as money is flowing into ETFs that appreciate with stock market volatility. These ETFs allow investors to track the VIX and hedge their equity portfolios against volatility and losses. This comes after stock markets have rallied more than 10% since the middle of February and the VIX has dropped slightly. This trend may indicate that investors and portfolio managers expect recent trends to reverse. The AUM of two leading ETFs that are meant to double the changes of the VIX have doubled this month. The VIX has fallen from 28 in early February to around 14 now, which is at levels not seen since last summer before China devalued the renminbi. The decrease in the VIX may be overdone as many of the downside risks to the market compared to early February still exist. Oil prices have rallied, the stock market has recovered its beginning of the year losses, and corporate spreads have tightened. If these trends change the VIX is due for a rally which would make this trade pay off.

Capital outflows out of China have slowed over the last week as investors expect rates in the US will stay lower for longer. Over the last year capital outflows from China have been heavy as investors seek to capitalize on higher rates and take money out of China as fundamentals weaken. However after the Fed shifted scaled back the dot plot these outflows have slowed down in pace. This has provided relief for China’s foreign reserves which had been under pressure over the last year. This relief is likely to be temporary as dollar strength is expected to return once the Fed gets closer to raising interest rates later in the year. Additionally, China’s economic fundamentals continue to deteriorate which will put further pressure on reserves.

Over the last month Asian currencies have rallied as the renminbi strengthened somewhat against the dollar and risk assets rallied over that time period. This increase is not expected to last long. China is committed to weaken the renminbi against the dollar in the long term and further monetary easing is inevitable. Considering that the yuan renminbi and other Asian currencies trade closely with each other, the emerging market currencies of other Asian are likely to follow the renminbi lower. As a result investors do not expect the recent move higher in Asian currencies to be sustained. Over the last month the renminbi has risen 0.5% to Rmb6.5126. The Malaysian ringgit and the South Korean won appreciated 4.1% and 5.9% respectively. Monetary policy also stands in the way of these rallies. Taiwan, Indonesia, and New Zealand have all cut rates in the last month, and South Korea is expected to follow suit.

Monday March 28

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