Wednesday December 28

Stocks fell today while long term bonds rallied. The S&P 500 fell 0.8% to 2,249 and the Dow Jones fell 0.6% to 19,833. Utilities and financials both underperformed the broader market. On that backdrop the 2 year Treasury yield rose 3bp to 1.27%. The 10 year Treasury yield fell 5bp to 2.51%. Accordingly 2yr vs 10yr flattened 8bp to 1.24%. An auction of 5 year Treasury debt drew strong demand, the highest level in two years. Similarly foreign demand for the issuance was at a record high, which indicates that international investors such as central banks are looking to capitalize on higher yields over the last month. Similarly the risk off appetite in stocks may have also contributed to the rally in long term Treasuries. Similarly pension funds and other large institutional investors rebalancing their portfolios for the end of the year could have contributed to buying in bonds as well. Several fixed income strategists estimate that rebalancing flows favor bonds versus equities this time around. The dollar was mixed on the day against peers. USD rose 0.4% against EUR to $1.0413. USD fell 0.2% against JPY to Y117.20. USD rose 0.4% against GBP to $1.2219. Oil prices inched up on the day. WTI and Brent finished at $53.91 and $56.19 respectively.

China over the last few years has been seeking to make its economy a more open, transparent place to invest for international investors. From the regulatory perspective it has succeeded in doing so. Markets in China have not been excessively volatile as they have been in the past which previously turned some investors away. Regulators have reduced this volatility by limiting margin lending and speculative trading. It is also believed that regulators directly buy stocks in order to support prices and keep markets on an orderly upward trajectory. However investors are still skeptical to allocate a lot of money to China, as a result of an unfavorable economic outlook. Additionally the fear that regulators may reverse their positions and stances without notice, like they did in currency markets in the summer of 2015, still looms large. Yields in China have been rising dramatically, and the yuan continues to devalue. Those trends are both tied to other underlying issues in the Chinese economy, especially high leverage for companies. Foreign investors in China only make up 2% of the overall market, which regulators want to increase. One of the methods that regulators have tried is a link between the Shenzhen and Hong Kong stock markets, making it easy and convenient to trade shares in both markets. However global investors haven’t reacted as hoped. It is expected that government-backed financial institutions own roughly 2.7% of the stock market there, positions that were accumulated in attempt to maintain order and prevent dramatic selloffs. Strict capital controls on the yuan also are keeping investors away from China.

Hong Kong is trying to compete with New York as a destination for IPOs. Jack Ma of Alibaba said that the reason he chose to IPO in New York was because of Hong Kong’s outdated IPO practices. Three large technology companies that are based in China are looking to IPO next year, and they will have to decide between Hong Kong and New York. This past year $24.6bn in new offerings were listed on the NYSE and the Nasdaq, and $24.5bn were listed in Hong Kong. The marquee IPO of next year will be Snapchat which will list in New York. Bankers expect a strong year in 2017 after much of this year was shut off as a result of political macro events. If the Snapchat IPO goes well then it could encourage other tech companies to follow suit. Analysts note that consumer and retail, technology, and energy sectors have the most backlog. Three companies in China, including Ant Financial, Lufax, and Zhongan are expected to list with respective valuations of $60bn, $19bn, and $8bn. There is a long queue to list in China, and as a result they could opt to issue elsewhere. New York could be more attractive for valuation and comparisons than Hong Kong.

Wednesday December 28

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