Tuesday December 20

Stocks rose for the second consecutive day as the Dow inches closer to 20,000. The S&P 500 rose 0.4% to 2,270 and the Dow Jones added 0.5% to 19,974. The KBW Bank index rose 1.5% while utilities advanced 0.2%. The two year Treasury fell 1bp to 1.22% and the 10 year rose 1bp to 2.56%. Accordingly 2yr vs 10yr steepened to 1.34%. The dollar was stronger today against peers. USD rose 0.1% against EUR to $1.0389 closer to parity. USD rose 0.6% against JPY to Y117.83 which has been a notable loser in the FX market due to rising rate differentials per BoJ policies. The BoJ left its policy unchanged which led to the depreciation today, some analysts had been expecting the central bank to lift its yield target. USD rose 0.3% against GBP to $1.2361. In Germany the 10 year bund yield rallied over the last few days to 0.27%. WTI rose 0.2% to $52.22 and Brent rose 0.8% to $55.36. Bullish activity across markets continues to prevail in spite of geopolitical risk that has come up over the last few days. Even the VIX was down 2% to 11.48.

The Italian government is seeking permission to borrow an additional EUR 20bn from parliament in order to recapitalize struggling banks. Analyst believe that MDP could receive bailout funds by the end of the week, as investors have all but lost confidence in the bank’s ability to find investors. The bank is trying to raise the necessary funds by the end of this week however many are skeptical. Share prices of MDP have been volatile over the last few weeks and were down 9% yesterday. The ECB has set a deadline of December 31 for MDP to meet its recapitalization loans. The company that is set to manage the distressed bank rescue fund has voiced some concerns over the bridge loan that was provided to MDP. Quaestio is set to complete in the securitizations of bad loans so it is necessary for them to get along with MDP. The government is hesitant to perform a bailout due to the unfavorable political ramifications but it is quickly running out of options. If the government intervenes with MDP, it may have to do the same with other Italian lenders which is what the large EUR 20bn figure represents. On the news for the bailout request Italian banks share prices rose between 1.5% on average.

In the aftermath of the presidential election investors piled into trades that suggested they were anticipating higher inflation. However post FOMC meeting last week some of those trades have lost momentum given that the Fed came across as a little more hawkish than expected. Before the Fed’s meeting the 10 year breakeven rate had been trading higher than 2%. That indicates that investors expected inflation to exceed 2% on average over the next 10 years. However after the Fed said it anticipates raising rates three times next year, the breakeven rate has dropped to 1.89%. That number is still more elevated than the 1.73% before election day. Investors have started turning away from TIPS since the FOMC meeting, which is a reversal of recent trends following the election. However over the course of the year inflows have still totaled a positive inflow of more than $11bn as inflationary concerns are back on the table compared to where the year started. TIPS tend to underperform normal Treasuries when rates rally, which is why some investors steer clear of using TIPS outright.

Tuesday December 20

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