Monday October 24

Stocks rose today even as rate hike expectations continued. The S&P 500 rose 0.5% to 2,151 and the Dow Jones rose 0.4% to 18,223. Economic data today showed that the PMI Manufacturing flashindex rose to 53.2 which was higher than the consensus. One of the sources for optimism today was likely a flurry of M&A activity, including the AT&T deal, the BAT deal, the Hilton deal, TD Ameritrade on Scottrade, and others. Rates sold off as rate hike expectations continue to rise. The 2 year yield rose 2bp to 0.85%. The 10 year yield rose 3bp to 1.77%. 2yr vs 10yr bear steepened to 0.92%. The dollar continued to strengthen against peers. USD rose 0.1% against EUR to $1.0871. USD rose 0.5% against JPY to Y104.22. USD rose 0.1% against GBP to $1.2217. Appreciation of USD is back on the list of concerns for US companies in the months ahead of the Fed’s tightening cycle. The market for Fed funds futures currently prices in a 70% of higher rates by the end of this year. China is slowly devaluing the renminbi as the offshore rate (CNH) hit a record low against USD at Rmb6.7880. Oil prices pulled back slightly at the start of the week. WTI fell 0.7% to $50.48 and Brent fell 0.6% to $51.45.

Venezuela promises attractive yields for investors if they are willing to stomach the risk. The country is currently in crisis mode, as food is scarce, infant mortality is spiking, and inflation is running at 500% as the government cannot afford to import food and medicine. However in spite of this President Nicolas Maduro continues to make debt service payments which costs billions of dollars each year. In spite of his commitment to pay investors many emerging market investors believe that a default in the near future is unavoidable. Emerging markets funds managed by Fidelity and T. Rowe Price each are allocated around 7% towards Venezuelan debt, and have both strongly outperformed benchmarks this year as Venezuela continues to make payments. This comes as the Venezuelan component of the JP Morgan Emerging Markets Bond Index has strongly outperformed the broader index. The benchmark is weighted 2% towards Venezuela however nearly 33% of funds in that space do not have any allocation to the country. The math isn’t looking good for Venezuela, which has $15bn due in the next two years and just $12bn in foreign reserves. Taking into account everything outstanding the government and the state-owned oil company has $65bn due. According to a law professor at Georgetown no government leader has prioritized debt payments over food for citizens since the 1980s in Romania under Nicolae Ceausescu. Normally a country in this position might go to the IMF for emergency financing, however prior Venezuelan governments broke ties with the IMF. Instead China has been a lender of last resort for Venezuela, as the Latin American country has received around $50bn in loans from China but the terms are unclear which raises uncertainty for investors.

Shares of both AT&T and Time Warner fell today after the $85.4bn deal was announced over the weekend. AT&T fell 1.6% and Time Warner fell 2.4% to $87.36 (compared to the purchase pice of $107.50 a share). This is indicative of investor skepticism that the deal will not go through the regulatory approval process. Representatives and candidates of both Republican and Democratic parties have spoken out against the merger. The concern is that the combined company would have too much influence over consumers in the media space. AT&T CEO Randall Stephenson addressed analysts on Monday and said that the concerns that may come up with regulators can be avoided with certain conditions. A research analyst at Citi argues that vertical integrations are less effective, and that the benefits to AT&T owning a content company aren’t readily apparent especially if AT&T must give other distributors access to Time Warner content. Stephenson says that owning the content is an advantage because it makes it easier to adapt distribution platforms quickly. Additionally Stephenson notes that there would be $1bn in cost savings between the two. The deal would also place AT&T among the most indebted American companies and as such Moody’s put AT&T on review for downgrade.

Monday October 24

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