Thursday September 8

Stocks fell today after the ECB came across as more hawkish than expected. The S&P 500 fell 0.2% to 2,181 and the Dow Jones fell 0.2% to 18,479. Economic data today showed that jobless claims fell to 259k in the last week which was slightly below the consensus, and continues to indicate strength in the labor market. Today the ECB held interest rates at -0.40% and maintained the current 80bn euro a month quantitative easing program. This fell short of analyst and traders’ expectations, who were expecting the ECB to hint at further easing either in the form of larger or extended asset purchases. Draghi said that ECB leaders had not talked about extending QE. Bonds in both Europe and the US sold off as a result. The 10 year German bund yield rose 6bp to -0.07%. Peripheral yields underperformed core yields. The Italian 10 year rose 7bp to 1.15% and Spain’s rose 6bp to 1.60%. In the US the 10 year Treasury rose 6bp to 1.60%. The euro added 0.2% against the dollar to $1.1260. USD rose 0.7% against JPY to Y102.49.

Central bank inactivity is causing turmoil in the markets. Rates have sold off as investors begin to expect that central banks in the US and in Europe may be taking a step back from their previous monetary easing policies. Yields across Europe moved dramatically in response to Draghi’s comments, which shows the significant influence of the ECB as the biggest buyer/ holder in the market. Similarly in Japan 30 year yields have risen significantly over the last two months from near zero in July to 0.50% currently. Markets and investors are highly exposed to central bank statements, and such unpredictable actions have been driving volatility.

Corporate share buybacks have been one of the main drivers of stock market returns since the financial crisis. Companies have been taking advantage of low borrowing costs, issuing debt and using the proceeds to buy back shares as a way of returning money to investors. Over the last three years companies have bought back $1.7tn in their own shares which has supported prices even as large institutional investors have been sellers. Equity fund flows have shown outflows of $1.1tn since that period of time. At the same time while companies have been returning money to shareholders, in the opinion of some economists and analysts they are neglecting investments in their own businesses. Citi research has shown that the ratio of dollars invested to dollars returned to shareholders has fallen to 2:1 down from 4:1 in 1995. One of the unintended consequences to this could be lower capital expenditures, lower expenditures on research, and lower productivity. Volumes in share buybacks have fallen over the last two years after recording 15% annual gains between 2010 and 2014. As this trend reverses the equity rally may lose some steam. Also a headwind to the buyback strategy is the fact that corporate leverage has also reached record highs according to some measures.

Wells Fargo got in trouble for opening 565,000 unwanted credit card accounts for its retail customers. Wells Fargo is known for its ability and emphasis on cross selling its services to different clients. In doing so the bank aims to have clients use checking, savings, brokerage, mortgage, wealth management, and other services the bank offers in order to earn more fees across the platform. WF’s credit card business is the most successful product line for product line as 82% of credit card holders also use the bank for other services. Wells Fargo employees are given incentives to cross sell the platform, which may help to explain why they were signing up customers for unwanted services. WF was fined $185mm and its reputation will also suffer. It is thought of in a different light as other banks that had their reputations damaged during the financial crisis. According to some analysts since WF’s scandal is more directly tied to consumer clients and is less complex than MBS issues other banks faced, there may be more significant reputational damage than initially expected. This could affect WF’s cross-selling strategy going forward.

Thursday September 8

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