Monday October 10

Stocks rose today along with oil prices even as the dollar strengthened across the board. The S&P 500 rose 0.5% to 2,163 and the Dow Jones rose 0.5% 18,329. The BKW Bank index performed in line with the broader market while utilities outperformed slightly. Energy stocks led indices today and led to optimism in general. Oil prices rise today after Putin indicated that Russia could potentially join a potential output freeze or cut. On that backdrop WTI rose 2.8% to $51.19 and Brent rose 2% to $52.97. The yield curve was unchanged today as markets were closed for Columbus day. In FX markets USD rose against most peers. USD rose 0.6% against EUR to $1.1139. USD rose 0.6% against JPY to Y103.63. USD rose 0.6% against GBP to $1.2362. The peso appreciated sharply against USD as did the Canadian dollar as markets perceived that Hillary Clinton won the debate. In Europe the German 10 year bund yield rose 4bp to 0.06%.

Foreign exchange markets have gotten more volatile as banks have reduced their presence in that space. For example early Friday morning (Hong Kong time) the British pound dropped from $1.26 to $1.18 (recorded as low as $1.15 on some platforms) in a matter of minutes. Post financial crisis as a result of increased regulation banks have reduced their presence in the FX market making space, and as a result volumes are lower and prices are more prone to extreme movements such as these. Based on headcount alone FX desks have shrunk by nearly 25% since 2010. Automated trading platforms run by prop firms and HFT have filled the void, however these all interpret the market in the same way and lead to large directional movements. Some analysts believe that if humans had a larger presence in the market than that volatile move would have been less likely since traders would be more tactile in executing trades in thin volumes. Just since last year Deutsche Bank has reduces its market share in FX market making from 15% to under 8% now. Citi, which still has the largest market share is down over that same time period from 16% to 13% At the same time FX trades executed by nonbanks has risen and gained market share as banks step back. These include companies such as Citadel Securities and XTX Markets.

The search for yield continues to push investors into riskier segments of financial markets. This comes as dry powder, or cash piles that are available for use at debt funs has been on the rise since 2009 and now stands at nearly $200bn. Australia is a hot target for these investors, and it is expected that distressed opportunities will arise as the commodity boom slows down. At the same time over the last year in Australia nonperforming loans started to tick up at banks, which is where distressed investors usually step in. Investors who are of the belief that the bulk of the pain is over now for commodity exporters as prices stabilize may find some bargains in existing NPLs. Hedge funds such as Lone Star and Oaktree have been opening up operations in Australia to take advantage of these opportunities with boots on the ground. Bain Capital and others have followed similar steps. These investors are targeting both entire companies and debt investments. Regulators are pushing banks to dispose of these assets, and investors as a result may be able to find great value given the forced selling. Similarly there are not many distressed debt investors based in Australia, which makes this a perfect storm for US based investors. In particular investors are targeting companies in sectors such as dairy farmers, property developers, and commodity mining companies.

Monday October 10

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