Thursday October 27

Stocks eased back today as rates sold off. The S&P 500 fell 0.3% to 2,133 and the Dow Jones fell 0.2% to 18,169. The KBW Bank index outperformed rising 0.5% while utilities fell 0.5%. Data this week has shown that the UK economy grew by more than expected in the third quarter, PMI indices have been solid across the world which has led to increased inflation expectations. Rates sold off in both the US and in Europe. The 2 year Treasury yield rose 1bp to 0.88%. The 10 year Treasury yield rose 6bp to 1.85%. 2yr vs 10yr bear steepened 5bp to 0.97%. In Europe the german 10 year bund yield rose 8bp to 0.17% and gilts yields similarly rose today as well. In spite of the selloff in government bonds spreads held in relatively well which is a supportive sign. The dollar was stronger across the board as investors expect a rate hike to occur. USD rose 0.1% against EUR to $1.0899. USD rose 0.7% against JPY to Y105.21. USD rose 0.6% against GBP to $1.2169. The dollar also continued its ascent against the yuan to Rmb6.7858. In commodity markets oil prices rose even though Iraq seeks exemption from the potential Opec output cut. WTI rose 0.9% to $49.64. Brent rose 0.7% to $50.34.

The M&A wave continued today. Qualcomm is set to acquire NXP for $39bn at a price of $110 per share. That purchase price represents a 34% premium to NXP’s average closing price over the last 200 days. This will be the largest M&A deal ever in the semiconductor industry. Each company makes computer chips however focuses on different areas. Qualcomm makes chips for mobile phones, and some analysts believe that it is too closely concentrated on one space. As smartphone sales may have peaked, Qualcomm’s growth prospects also will peak and revenues are expected to fall as a result. Qualcomm’s stock price accordingly has lost 10% while an index of semiconductors has risen 35%. NXP makes computer chips for cars, and as such Qualcomm will be diversifying its business dramatically. As automobile automation increases there is a major opportunity for growth for companies that make computer chips for cars. NXP gets 41% of its revenues from car chips. Currently phone chips account for 61% of Qualcomm’s revenues but after this deal they expect that number will fall to around 48%. The deal will be financed using debt and cash. NXP is based on the Netherlands which is advantageous because 92% of Qualcomm’s cash is offshore.

Rates sold off today as a result of higher inflation expectations. Today the 10 year yield sold off to 1.85% at midday. The German bund yield rose 7bp to 0.16% and the gilt yield rose 10bn to 1.26%. Rates have rallied over the last few years and months on inflation and growth expectations. As inflation has showed signs of picking up, investors are rethinking their anticipated inflation estimates. Oil prices have risen this year, PMI manufacturing numbers in Japan, the Eurozone, and the United States have been recovering. Investors who have taken more duration risk in this environment are the most exposed to losses. Inflation numbers in the EU, the UK, and the US are all on the uprise. US CPI is up 1.5% from the last year, and that number in the UK and EU is 1.0% and 0.5% respectively and all have been on upward trends since the start of the year.

The prevalence of flash crashes over the last few years has led to investors using stop-loss orders to change their habits. Stop-loss orders are intended to protect investors in times of volatility, and they are intended to sell a certain asset if it drops below a certain level (i.e. a currency depreciating by a certain amount). In certain times of very high volatility it may be impossible for algorithms and traders to execute at the desired level, and as a result investors aren’t getting the execution they were looking for. For example in this situation an investor might end up getting pricing that is lower than what the stop-loss order specified. Stop-loss orders also intensify volatility in times such as these. FXCM has which is a large currency trading platform said that 40% of stop-loss orders that were executed on its own platform were below the specified level. Limit orders are an alternative, and guarantee investors the price they want. If they don’t get the price they want then the trade isn’t executed, which presents another set of risks.

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Thursday October 27

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