Tuesday November 1

Stocks fell today as a result in increased political risk in the United States. The S&P 500 fell 0.7% to 2,111 and the Dow Jones fell 0.6% to 18,037. Utilities sharply underperformed the market falling 1.8% while the KBW Bank index was even. Economic data today showed that the PMI Manufacturing index rose from 51.5 last month to 53.4 this month which was led by an upturn in new orders. The ISM Manufacturing index also came in at 51.9 which was slightly higher than the consensus. Investors are also positioning themselves ahead of meetings this week from the Fed and the BoE. Investors today priced in a closer election as polls reflected Trump gaining momentum. On this backdrop Treasury rates fell and haven assets rose. The 2 year yield fell 1bp to 0.84% and the 10 year yield rose marginally to 1.83%. 2yr vs 10yr steepened to 0.996%. Earlier in the session rates had sold off after economic data out of China showed that factory activity was on the rise at the highest level in two years. The reduced concerns about the Chinese economy were offset by news that an ABC poll had Trump leading the race. USD fell 0.7% against EUR to $1.1056. USD fell 0.7% against JPY to Y104.09. USD was unchanged against GBP to $1.2239. USD rose 1.8% against MXN to P$19.193. USD fell 1.4% against CHF to SFr0.9754. Similarly gold prices rallied on the increased political risk rising 1.3% to $1,289. Oil prices continued to drop. WTI fell 0.2% to $46.75 and Brent lost 0.7% to $48.27.  The VIX remains elevated rising more than 9% today to 18.63.

Valeant is in talks to sell one of its underlying businesses to a Japanese pharmaceutical company for $10bn. The purpose of the deal is to raise capital and ease some pressure on Valeant relating to it’s debt burden. Last year Valeant bought Salix Pharmaceuticals which makes stomach drugs however now that business set to be sold off. Valeant’s shares rose 34% after the talks were reported. In addition to paying down debts (which has been a priority after the accounting scandal) the deal will allow Valeant to focus on its core businesses of skin and eye drugs. Valeant faced regulatory pressure earlier in the year as a result of questions surrounding its business tactics and accounting practices. Through a series of acquisitions Valeant amassed more than $30bn in debt. $12bn of that is loans that are due to banks and $19bn of that is in bonds that are due beginning in 2020. Valeant stock has fallen more than 90% since 2015.

Asset bubbles in several markets pose a threat to the Chinese economy. Generous fiscal stimulus as well as a lot of financial speculation have driven up valuations for assets ranging from real estate, antiques, art, agricultural commodities, and bonds. As growth in China slows and the government continues to pump in stimulus and credit remains readily available investors are looking for places to put money and they are running out of ideas. As a result of this stimulus over the last 10 years the money supply in China has quadrupled. Given all of these “mini-bubbles” a professor at Peking University argues that there would have to be multiple coincidences coming together at the same time in order for there not to be a larger bubble at hand. Iron ore prices have rallied significantly this year as high as 50% with trading volumes through the roof. The same story can be told with other industrial metals such as copper zinc and aluminum. Apartment prices in Shenzen were up nearly 50% last year and those trends are likely to continue. Debt to GDP in the country has risen to 260% it is expected to reach this year and the number has diverged dramatically from the trendline. The wave of speculation has flowed from property, to real estate, to stocks, to bonds, and now to commodities.

The corporate bond market is on pace for a record pace of issuance. This has been fueled by a wave of M&A activity that reached record totals this month. As of late 2015 there was more than $900bn in mergers and acquisitions that hadn’t yet been financed however that backlog had fallen to $246bn before October. After this month’s activity that total has risen to $460bn. This has also been fueled by unprecedented monetary easing around the world which has allowed corporations to issue debt at lower and lower yields.

Tuesday November 1

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