Thursday September 29

Stocks fell today as concerns about Deutsche Bank continued to plague markets. The S&P 500 fell 0.9% to 2,151 and the Dow Jones lost 1.1% to 18,143. The KBW Bank index lost 1.5% and utilities also underperformed the market. Economic data today showed that jobless claims once again came in below consensus. Reports surfaced today that hedge funds are starting to reduce their exposure to Deutsche Bank, which sent share prices falling. Financials suffered as a result of these concerns. In fixed income markets the 2 year yield fell 2bp to 0.74% and the ten year yield lost 1bp to 1.56% possibly as a result of the flight to quality. 2yr vs 10yr bull steepened 1bp to 0.82%. In foreign exchange markets the dollar was for the most part stronger against peers. USD finished flat against EUR at $1.1220. USD rose 0.4% against JPY to Y101.1. USD rose 0.4% against GBP to $1.2966. Oil prices continued their rally from yesterday on hopes Opec will come to an agreement to cut production. WTI rose 1.3% to $47.65 and Brent rose 0.7% to $49.03. The German 10 year bund has fallen on these concerns and is down to -0.12%.

Oil prices rallied over the last two days as members of Opec agreed that some sort of oil output cut is necessary. Although the organization will wait until November to finalize any deal, this is a step in the right direction for the group of countries and oil exporters that previously could not seem to agree on anything. A committee is going to be established to decide which countries will cut production by which amounts. This is the most difficult part of negotiations and where talks have broken down before. Within Opec Saudi Arabia is currently producing the highest amount of oil each day at 10.6 million b/d. Iraq and Iran are a distant third and fourth respectively at 4.4 and 3.6 million. Yesterday oil prices shot up on this news and equity prices benefited as well. However even with an agreement there is pressure on oil prices. A 200,000 b/d cut to production and the supply glut would remain until the latter half of next year according to analysts. In order for the supply glut to be drawn down by the end of this year the organization would need to collectively cut 700,000 b/d in production.

Japanese investors have been entering into new investment markets in order to find yield, given the rate environment in their home country. According to BAML institutional investors in Japan have put nearly $450bn in foreign assets over the last year which is nearly a 75% increase from the prior period. Instead of JGB’s or US Treasuries Japanese investors are targeting bonds in riskier markets such as peripheral Eurozone countries. US Treasuries currently yield around 1.6% however when including cost of hedging against foreign exchange movements that yield has gone to zero given how popular of a trade that has been. These investors therefore have to move into new locales in attempts to find yield. Net investments in foreign debt for Japanese investors has been on a strong rising trend each month since the start of last year.

Janet Yellen spoke in front of the House Financial Services Committee, and said that there was “no fixed timetable” for monetary tightening. However she did come across as slightly hawkish indicating that rate increases were expected if the economy continues to improve. According to Yellen the unemployment has held at 4.9% because workers are coming off the sidelines in healthy numbers to keep labor markets tight and the economy adding jobs at the pace of 180k a month on average. She did echo Eric Rosengren and express that continued tight labor markets could push inflation higher than expected which could result in a higher trajectory of tightening than expected. That being said she expressed that the 2% target was by no means a cap, which suggests that she may be comfortable overshooting the target to an extent.

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Thursday September 29

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