Friday April 22

Stocks finish mostly flat on the day however still higher on the week. The S&P500 was flat at 2,091 and the Dow Jones rose 0.12% to 18,003. In the US weak earnings from General Electric and Caterpillar followed earnings misses yesterday from Google, Microsoft, and Starbucks. This put downward pressure on equity prices to end the week, however higher oil prices provided support for indices. Brent crude oil rose 1.6% to $45.08 and WTI rose 1.25% to $43.72. The US dollar appreciated on the day with the WSJ dollar index rising 0.63%. The most notable movement came from the Japanese yen. The US dollar rose more than 2% against the yen to Y111.78 after investors focused on the possibility for further monetary easing. This sent the Nikkei up 1.2%. The dollar rose 0.6% against the euro to $1.1227 in the aftermath of Mario Draghi’s comments yesterday. The yield on the US two year rose 1 basis point to 0.82%. The yield on the ten year rose 2 basis points to 1.89%. The KBW bank index continued its advance after earnings from large financials were released at the beginning of the week and last week. Since the JP Morgan kicked off earnings season for US financials, the index is up nearly 10%.

Investors begin to return their attention towards a potential rate hike in June. Rising oil prices and resilient stock indexes make it more likely that the Fed will be willing to take action. The labor market continues to strengthen, as indicated most recently by the jobless claims data yesterday. If international financial markets hold firm through June and domestic economic data continues on current trends, the argument could be made that higher rates are warranted. Over the last month or so the dollar weakened after investors priced in lower rates for longer. So far the dollar is down 4.4% year to date. This may change in the coming weeks if inflation and labor market data show signs of improvement. Earlier this week Eric Rosengren of the Boston Fed said that the market was underestimating how close the Fed is to raising rates. The odds of a June rate hike remain at only 21% currently. The odds of any rate hike at all before the end of the year is just 65%. Selling Fed funds futures may become profitable as expectations shift.

In spite of the various signs of pressure in the US high yield market, the market may be supported as a result of other factors relevant in the global financial markets. The risks to high yield bonds are rising. Defaults are high, downgrades are on the rise, and credit conditions are set to tighten for many companies. However due to the record low yields that are evident in fixed income markets, this could put downward pressure on junk bond yields in the months ahead. In the search for yield, investors will be pushed lower on the credit spectrum. High yield US bonds have returned 6% this year so far as a result after a selloff to start the year. Accordingly the average yield on a US junk bond has fallen from 10% at the start of the year to 6.9% now. With oil prices stabilizing, there may be great value in the market for high yield bonds.

Investors hope that this week may mark a turning point for oil. Even after Opec leaders were not able to agree on a production freeze, prices rose since investors expect a rebalancing in the oil market. Additionally some analysts expect that this week hedge funds covered short positions which put upward pressure on prices. Economic data has shown that production in the US is slowing and inventories are drawing down. However standing in the way of that is increasing production from Iran, who is trying to ramp up its production after years of international sanctions. Fortunately the country has been unable to increase production at the rate previously expected.

Friday April 22

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