Wednesday November 16

Stocks pulled back slightly today as yields held steady. The S&P 500 fell 0.2% to 2,176 and the Dow Jones fell 0.3% to 18,868. The KBW Bank index fell 2% while utilities fell 0.8%. Economic data today showed that US PPI came in flat on the month compared to estimates which called for a 0.3% gain. Core numbers were off as well. James Bullard spoke and came across as relatively hawkish, saying that he is leaning towards a rate hike in December. Interest rates were roughly unchanged on the day. The 2 year yield was unchanged at 1.01% and the 10 year yield was flat at 2.22%. 2yr vs 10yr finished at 1.21%. The dollar strengthened against most peers. USD rose 0.4% against EUR to $1.0684. USD fell less than 0.1% against JPY to Y109.13. USD rose 0.1% against GBP to $1.2437. In commodity markets oil prices fell after data showed that inventories rose by more than expected. WTI fell 0.7% to $45.48 and Brent fell 1% to $46.48.

The Chinese yuan has been depreciating fairly significantly against the US dollar, however it is not necessarily an example of currency manipulation as Donald Trump would suggest. The reason behind the yuan’s devaluation relates to domestic economics within China as well as the dollar’s strength across the board against all currencies. The Chinese government is weakening the yuan in attempt to temper some of the asset price bubbles in their economy, particularly in real estate. Expectations for a weakening yuan are prompting Chinese citizens and investors to take money out of China, which perpetuates the problem of a weakening yuan and drives the currency further downwards. The yuan is currently at Rmb6.8592 which is the weakest level in more than eight years. It is up 1.4% over the last week. The PBoC has not yet made any public statements explaining the recent devaluation as it has in the past. Based on sell side research and forwards markets, analysts and traders both expect further depreciation over the next year. Trade tension between the US and China could also put downward pressure on the yuan. The Chinese government is in a tough spot. While it wants to curb speculation and asset price bubbles in real estate, that sector is a big driver of economic growth right now which is why they can’t pump the brakes too hard.

Oil prices have been very volatile over the last few weeks and are basically trading on the binary outcome of the Opec deal. Prices fell 11% over the last month as Opec hopes deteriorated. Additionally economic data showed that supplies were rising heavily and that inventories hit record levels. A stronger dollar also contributed to softer oil prices. Opec members have been increasing their production steadily trying to get out as much as they can ahead of a possible output cut. Given supply and demand fundamentals the only reason for any type of bullish movement would relate to an Opec deal. Over the last few days prices have jumped on those hopes after the Saudi Energy Minister spoke of the importance of reaching an agreement. There is some skepticism that even if a deal were reached, it wouldn’t do enough to successfully prop up prices. Last week investors increased bearish positions against oil prices by a record amount according to CFTC data.

Wednesday November 16

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