Monday August 15

Stocks start the week off with modest gains. The S&P 500 and the Dow Jones each rose 0.3% to 2,190 and 18,636 respectively. The DJ Transportation Average was down 0.6%, KBW Bank shares were up 1.2% and utilities were down 1.6%. Contributing to optimism today was higher oil prices. WTI rose 2.7% to $45.70 and Brent rose 2.8% to $48.30. Oil prices rose today as a result of renewed hopes of an output freeze by Opec. Stocks are also being driven higher by diminishing returns in fixed income markets, as well as expectations for further monetary stimulus. The US dollar drifted back against peers continuing Friday’s trend after the weak retail sales data. The euro rose 0.2% to $1.1184. The yen rose fractionally to Y101.26. The pound bucked the trend and fell 0.3% to $1.2885. The ten year yield backed up 4bp to 1.56% and the two year yield rose 2bp to 0.73%.

In spite of the rally in high yield and risk-on assets distressed debt funds have missed the rising tide. According to a BAML index of distressed junk bonds the sector is up 33% this year. The BAML high yield index in general is up 13.5%. At the same time distressed debt hedge funds are only up 6.2% YTD. CCC rated indices have outperformed this year and are up around 25%.

FX carry trade demand has boosted the value of the Russian ruble and other EM currencies. The carry trade involves investors borrowing cheap funds in countries with low yields and investing in emerging markets at high yields. The risk here is that the emerging market currency may depreciate against the domestic currency which erodes returns. As the dollar looks likely to remain low for the time being, demand for the carry trade has increased. This is reflected in high demand for EM currencies, as the Russian ruble is up 1% against USD. Similarly the South African rand is up 14% YTD against USD. Similarly central bank activity and stimulus reduces volatility which is good for the carry trade as well.

Bearish bets against the British pound are popular today among investors. The short trade is potentially becoming a crowded one. According to the CFTC speculators are net short 90,082 contracts against GBP. Before the EU referendum that number was 51,957 and at the start of the year that number was 30,496. The pound is currently at its weakest level since 2010. DB expects the pound to reach $1.15 at the end of the year. GS expects $1.20 in the next 3 months.

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Monday August 15

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