Wednesday January 11

Stocks rose after Donald Trump’s much anticipated press conference. The S&P 500 rose 0.3% to 2,275 and the Dow Jones rose 0.5% to 19,954. Healthcare stocks were the biggest underperformers after Trump singled out pharmaceuticals and said they were “getting away with murder.” The Nasdaq Biotech Index fell 2.7%. The two year Treasury yield fell 1bp to 1.19%. The ten year Treasury yield also fell 1bp to 2.37%. Accordingly 2yr vs 10yr finished at 1.18%. The US dollar fell against peers with a 0.2% drop for the dollar index. USD fell 0.2% against EUR to $1.0570. USD fell 0.3% against JPY to Y115.45. USD fell 0.2% against GBP to $1.2201 after initially trading higher. Oil prices rallied as volatility continues. WTI rose 2.8% to $52.24 and Brent rose 2.7% to $55.10. Trump’s press conference didn’t do much to address investor questions on potential fiscal stimulus and deregulation.

The Fed and other regulatory agencies in the United States are close to coming to a resolution on how they can best regulate upstart Fintech companies. The OCC is in the process of allowing mobile apps to apply for national banking charters the same way that brick and mortar banks have. That will promote competition between the two types of financial companies. Having a national charter is advantageous for fintech companies since that would enable them to operate in certain states without abiding by some of their specific lending rules. However those states are gearing up to fight against fintech companies receiving that national charter. Certain states have rules that prevent loans being made at interest rates higher than a specific threshold in order to prevent abusive lending practices. However they argue that fintech companies may be able to circumvent those laws which is not good for their constituency. The alternative would be to have fintech firms apply for consumer lending licenses in each state they wish to do business in. California, Colorado, and Texas have already had problems with fintech companies and their lending practices.

Regulators in China are concerned about some of the investment practices from Chinese insurance companies and the manner in which they raise cash. Insurance companies in China have been selling products to customers that are essentially one year deposits that offer attractive interest rates. They then use that premium income to purchase companies, both foreign and domestic, in aggressive manners. Regulators in China have drawn comparisons to the LBO era in private equity in the United States. Insurance companies such as Anbang, China Life, and Foresea life have made significant investments in equity markets with deals valuing in the several billions of dollars. Customers have been drawn by high returns which has made them willing to pay the initial premiums. Additionally the sales are typically made online which allows insurance companies to fundraise from a wide variety of people quickly and cheaply. Premium income grew 20% last year to $370bn and it’s expected to hit $700bn by 2020. This is risky because regulators fear it has the potential to destablize the insurance industry if some of these investments go bad.

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Wednesday January 11

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