Monday October 31

Stocks finished lower today in spite of starting the day out stronger as oil prices sold off. The S&P 500 fell marginally to 2,126 and the Dow Jones fell 0.1% to 18,142. The DJ Utility Average rose 2% while the KBW Bank index was roughly in line with the market. Economic data today showed that personal incomes and consumer spending rose roughly in line with expectations. The headline and core PCE numbers were 1.2% and 1.7% as the headline number picked up from the previous month. On that backdrop rates fell as markets still digest news that the FBI opened up another probe related to the Hilary Clinton email situation. The two year yield fell 2bp to 0.85% and the ten year yield fell 2bp to 1.83%. The spread between the 2yr and the 10yr fell marginally to 0.97%. The market for Fed funds futures is pricing in a 17% chance that the Fed raises rates this month and 69% chance at the December meeting. The dollar was mixed today against peers. USD rose 0.1% against EUR and JPY to $1.0982 and Y104.84 respectively. USD fell 0.5% against GBP to $1.2244. WTI fell 4.1% today to $46.7 and Brent fell 2.8% to $48.32 as pessimism about an Opec deal builds.

General Electric agreed to merge its oil and gas businesses with Baker Hughes and the resulting entity will be a standalone publicly traded company on the NYSE. The new company will be owned 62.5% by GE and 37.5% by shareholders of Baker Hughes. The company will provide equipment and services to oil wells and drilling platforms. GE will be able to benefit from any recovery that occurs in this space, and there are also expected to be savings and synergies from combining the businesses. Shares of both GE and Baker Hughes rose following the announcement. Baker Hughes had previously entered into a $35bn merger agreement with Halliburton however that deal was struck down.

CenturyLink announced that it would buy Level 3 Communications for $25bn at a share price of $69.92. Before the talks were reported last week Level 3 closed at $46.92 and as such CenturyLink will acquire Level 3 at a 49% premium. Level 3’s share price rose to $58.41 today. Level 3 provides internet backbones and has shifted focus to small and midsize businesses. CenturyLink operates local phone services and is looking to update its network.

Through the first six months of the year stock market sectors such as utilities and consumer staples outperformed. Those sectors are viewed as bond substitutes since they are relatively safe and they pay high dividends, and they are looked at as a defensive option for investors. However this trade has become very crowded and now investors are exposed to the downside. As investors have piled in to these assets en masse, they are exposed to a wave of selling that could be intensified when the Fed raises interest rates. To protect against losses in these stocks investors typically buy puts. Indicative of these concerns puts for ETFs that track utilities and consumer staples sectors are very expensive. On a cross asset hedging basis according to BAML it is most expensive to hedge against defensive sectors than it is for the 34 other assets it tracks including Brazil stocks, oil, and the Russian ruble.

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Monday October 31

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