Tuesday August 30

Stocks eased back slightly today as the US dollar rose and oil prices fell. The S&P 500 fell 0.2% to 2,176 and the Dow Jones lost 0.3% to 18,454. Utility stocks today fell more than 1% and financials rose 1.2% which is indicative of higher rate expectations. This comes after Janet Yellen’s relatively hawkish speech on Friday and data yesterday that showed personal incomes picked up last month. Economic data today showed that consumer confidence rose from 96.7 in July to 101.1 in August. Apple shares fell today after the EU imposed a large tax penalty on the company for tax breaks received in Ireland. Oil prices fell today with Brent losing 1.8% to $48.37 and WTI finished 1.5% lower at $46.28. The dollar index rose 0.5%. EUR fell 0.4% to $1.1139 and JPY fell 1.1% to Y103.03. The market for Fed funds futures is currently pricing in a 34% probability of higher rates in September. The ten year Treasury yield fell 1bp to 1.57% and the two year Treasury yield fell 3bp to 0.80%. The spread between 2s and 10s bull steepened to 77bp.

The FDIC’s insurance fund has been on the rise which represents the health of the US financial system post-crisis. At the peak of the crisis in 2009 the FDIC had a deficit of $20.9bn. The fund now stands at $77.9bn which totals 1.17% of the deposits it insures. This is above the threshold of 1.15% which means that 93% of the banks with $10bn in assets or less that pay premiums into the fund will pay smaller premiums going forward. For larger banks, there are additional surcharges as a result of new regulations and they do not benefit in the same way smaller banks do. The fund still has room to grow, as the ratio is required to reach 1.35% by 2020 per Dodd Frank. The FDIC expects that it will hit that level in 2018, and once that happens the largest banks will stop paying surcharges. The FDIC also came out with a report today that suggested commercial banks and savings institutions had a strong second quarter with a rise in net income of 1.4%. There is high demand for loans, and banks have as a result benefitted from higher loan growth. Headwinds to the sector continue to be low net interest margins, low ROA and exposure to the energy sector.

Emerging market assets have rallied this year however still remain exposed to a potential Fed rate hike. This includes both bonds and stocks, and the top performers are Brazil and Russia. Even Turkey has recovered to an extent in the aftermath of a coup attempt last month. Business spending and investment is on a rising trend in spite of higher interest rates, which contrasts with a 3% decline in capex in developed markets. Higher business spending has led to higher industrial production and more exports. In east Asia tech output rose 7% in the second quarter, with Taiwanese exports recording 5% gains. These exports have been driven by strong consumer spending in developed markets, such as the US. Outside of technology exports growth is not great, which means that those economies are sensitive to that particular sector. One tailwind is low rates in other parts of the world, which has pushed some investors into emerging market stocks and bonds in search of yield. Due to the extent of monetary easing in Europe, Japan, and elsewhere fundamentals have shifted out of focus and technicals are increasingly relevant which supports EM assets. If the Fed raises rates which results in another taper tantrum, emerging markets will likely be vulnerable.

Goldman Sachs is rolling out an algorithmic trading platform that electronically prices bonds for clients. GSA (Goldman Sachs Algorithm) will be used for US corporate bonds that are trading in sizes less than $1mm (odd lots). Prices on GSA are dynamic and respond to other trades in the market throughout the day. Between $75mm and $100mm bonds are traded on the platform each day. Goldman, along with other investment banks is supporting the initiative of electronic trading as it brings down costs. Gary Cohn has said in the past that he expects pricing and execution in fixed income to shift more towards automation.

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Tuesday August 30

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