Tuesday March 29

Stocks rose after dovish comments from Janet Yellen. The S&P500 rose 0.9% to 2,055 and the Dow Jones rose 0.6% to 17,633. With today’s gains the two main stock indices reentered positive territory for the year. Markets digested comments made by Yellen and interpreted that the Fed funds rate will stay lower for longer. The dollar fell in the aftermath of Yellen’s comments. The euro rose 1% to $1.1301 and the yen rose 0.7% to Y112.60. This must be frustrating for the ECB and the BoJ actively seek to weaken their currencies. Similarly Treasury yields fell with the two year losing 8 basis points to 0.79% and the ten year falling 7 basis points to 1.81%. The gains in equities came in spite of a renewed drop in oil prices. Brent fell 2.8% to $39.14 and WTI lost 3.4% to $38.50.

The capital markets are easing somewhat as companies seek to raise debt after a slow start to the year. Western Digital is set to offer $5.6bn in high yield bonds that will be used to finance the acquisition of SanDisk. Bank of America is expecting a 10.5% yield on the riskier set of unsecured bonds and a 7.5% on the less risky secured bonds. Both of these yields have risen around 1% since the offering began to be priced last week. Investor appetite for junk bonds has been weak since the start of the year and this deal will be a test of the market as risk assets have rallied for the last month. The higher than expected yields reflect that investor demand is still lacking. Investors have been pouring money into high yield funds over the last week, which suggests that at some point demand for such issues will rise. Similarly Spotify is expected to raise $1bn in convertible bonds. Valuations for tech companies have slid back over the last few months, and given the turmoil in stock markets the startup has opted to raise debt. The company, which is currently private was valued at $8.5bn as recently as last June. If Spotify IPOs at any time over the next year investors in the convertible offering will be able to convert their debt to equity at a favorable discount to the determined share price. That discount will decrease in 2.5% increments as any potential IPO date is pushed back. The convertible bonds will pay 5% that will rise 1% every 6 months until an IPO or until it reaches 10%. Private equity firms TPG and Dragoneer will absorb most of the $1bn offering with the remainder going to Goldman Sachs clients.

Janet Yellen highlights the risks that face the US economy and takes a dovish tone in a speech made in New York. Yellen noted the importance of taking a cautious stance when deciding whether or not to raise interest rates in future months. In the aftermath of her comments the US dollar weakened and Treasury rates fell. Yellen issued upbeat comments on the domestic US economy including the labor market, consumer spending, and the housing market. Investors have been observing a rise in inflation rates since the start of the year, however Yellen has indicated that she is concerned that this to be a result of temporary factors. Although several threats to the economic recovery still remain, financial markets have rallied as investors scale back their expectations for the trajectory of interest rates. There does not seem to be a unified opinion coming from the FOMC right now. Last week several members of the FOMC indicated that higher rates may very well be warranted this year. Even today John Williams of the San Francisco Fed indicated that inflation may reach the 2% target sooner than expected which would necessitate higher rates than investors are expecting.

In spite of the rally over the last month in risk assets such as stocks, high yield credit, and emerging market currencies many investors still remain skeptical. Markets have rallied as investors expect rates to stay lower in the US for longer, oil prices have been firm around the $40 level, and economic data out of the US continues to appear strong. However haven assets that rallied in the beginning of the year, which investors used to protect assets in the risk off environment have not fallen significantly since the start of the market rally. Normally under such circumstances investors would shift into risk on assets while simultaneously shifting out of risk off assets. However while risk on assets have rallied over the last month, assets such as gold, the Swiss franc, and the Japanese yen have barely budged from the levels they were at in early February when the market rally started. This could reflect that investors are not yet convinced that the market rally is sustainable, and thus are opting to keep money in secure assets. Many of the threats facing markets, such as a Renminbi devaluation, falling profits, emerging market debt levels, and low oil prices still remain. Additionally the put/ call ratio ratio suggests that investors are positioning themselves in the event of a market downturn.

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Tuesday March 29

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