Tuesday November 29

Stocks rose marginally today even as skepticism continues about the Opec meeting tomorrow. The S&P 500 and the Dow Jones each rose 0.1% to 2,204 and 19,121 respectively. Utilities and financials both outperformed indices, while the energy sector fell 1.2% lagging indices. Economic data showed that third quarter GDP was revised higher than expected, showing Q/Q growth at 3.2% at an annualized rate. Additionally consumer confidence rose last month which shows that Trump’s election and aftermath had a positive effect there. The two year Treasury yield fell 2bp to 1.09%. The ten year Treasury yield fell 2bp to 2.29%. 2yr vs 10yr was flat at 1.20%. USD fell 0.3% against EUR to $1.0643. USD rose 0.4% against JPY to Y112.41. USD fell 0.6% against GBP to $1.2487 after some better than expected economic data out of the UK, and as net short positions against GBP ease back. A UK issuance of gilts that function similar to TIPS in the U.S. was met by high demand, indicating that investors may be expecting inflation post-Brexit. Italy’s 10 year bond yield fell 8bp as the ECB said it would accelerate purchases of Italian bonds to help alleviate some of the pressure leading up to the referendum vote on Sunday. WTI fell 3.8% to $45.27. Brent fell 3.9% as investors turn pessimistic about Opec’s meeting tomorrow.

The fate of the oldest bank in Italy, Banca Monte dei Paschi, lies in the outcome of the referendum vote on Sunday. The bank’s share price has fallen from e125 at the start of the year to less than e25 currently. A “No” vote would bring a good amount of uncertainty to the Italian financial sector, which could put Monte dei Paschi’s future in jeopardy. The bank is currently facing roughly $29.7bn in NPLs and it needs to raise e5bn in capital to prevent itself from going bankrupt. The first step towards raising that total is a e1bn debt to equity swap. Investors who hold certain subordinate Monte dei Paschi bonds would be able to swap the debt at 100% face value for equity. This could be attractive for investors who bought bonds recently, as they are trading at severe discounts. The current administration in Italy has been a big supporter of MDP’s recapitalization plan, so if Renzi resigns it could spell trouble for the bank. The second step of its recapitalization plan is to issue around e4bn in new shares, which is risky considering it is more than 7x its current market cap. The bank has faced several deposit runs over the last few years, however now it is relatively cushioned from that threat given a liquidity coverage ratio of 153% compared to the required 70%. Analysts expect that if the “No” group prevails, MDP’s share price would collapse which would force a government intervention. Undoubtedly any troubles faced by one of Italy’s largest and most prominent banks will have ripple effects throughout the financial sector. UniCredit is in a similar situation, and is facing e80bn in bad loans and is also raising capital quickly.

Oil prices fell today as skepticism returned about the Opec meeting tomorrow. The tension between Saudi Arabia and Iran will likely be the biggest hurdle for negotiations. Iran is looking for an exemption to cut production, while Saudi Arabia has no intentions of letting Iran receive an exemption. Analysts at Goldman Sachs estimate that markets are currently pricing in a 30% chance that a deal is reached tomorrow. It is expected that if the deal falls through prices would fall to around $35. Opec in September said they agreed on a 200k to 700k b/d production cut. Production in the United States has been ramping up as supplies have been high. Forecasts from the Energy Department show that crude production next year is expected to be higher than it was previously estimated. Many believe that a cut wouldn’t work for Opec. If they do decide to cut production, and oil prices rise into the $50s towards $60, many other producers would ramp up production and open new wells which would send prices back to current levels or lower.

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Tuesday November 29

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