Tuesday January 24

Stocks rose today and the S&P 500 touched a record high. The S&P 500 rose 0.7% to 2,280 and the Dow Jones rose 0.6% to 19,912. The KBW Bank index rose 1.5% while utilities were flat. Economic data showed that the PMI Manufacturing index flash rose to 55.1 with support from new orders and purchasing activity. Industrials and materials shares benefited from Trump’s efforts to speed up progress on oil pipelines. Trump made efforts to make the permit process for infrastructure projects easier, speed up  environmental reviews on manufacturers and state that pipelines should be built with U.S. steel. Those actions could have led to a revival in the Trump trade which we saw today. The two year Treasury yield rose 6bp to 1.20%. The 10 year Treasury yield rose 6bp to 2.46%. The dollar was stronger on the day against peers. USD rose 0.3% against EUR to $1.0734. USD rose 1% against JPY to Y113.79. USD rose 0.2% against GBP to $1.2515. Commodity prices were up slightly on the day. WTI rose 0.6% to $53.05. Brent rose 0.1% to $55.31.

The Supreme Court in the U.K. said that the government must bring the EU exit process to parliamentary vote before invoking article 50. Parliament must vote in order to begin the process of formally leaving the EU, which goes against the plans of Theresa May. The president of the Supreme Court said that the rights of UK residents and citizens would be affected by leaving the EU and that was the rationale for requiring parliament to authorize the formal exit process. It is also important to note that the Supreme Court ruled that governments of Scotland, Wales and Northern Ireland don’t need to be consulted which is good for Theresa May since that would have complicated the process. That increases the likelihood of some kind of referendum in Scotland to leave the U.K. at some point. Following the announcement the pound experienced volatility. It rallied at first but then fell once again after it was announced that devolved governments wouldn’t be involved in the parliamentary decision. This is a chance for opposition political parties to challenge and amend the government’s negotiations. Another explanation for the muted reaction in FX markets is the fact that the outcome was already priced in. Analysts note that the possibility of parliament voting to not invoke article 50 is virtually zero.

Fannie Mae agreed to guarantee $1bn in debt from Invitation Homes which is owned by Blackstone. Invitation Homes after the financial crisis bought around $10bn in foreclosed homes at deeply discounted prices, and they now rent those homes out as an institutional business. Invitation is now planning an IPO, similar to American Homes 4 Rent and Colony Starwood Homes. Both Wells Fargo and Fannie Mae committed to backing a 10 year $1bn loan that will be used to repay existing debt. Invitation Homes sells bonds that are backed by rental revenue for groups of homes it owns. This is a reversal from previous years when the FHA, which regulates Fannie and Freddie, prevented the agencies from backing institutions that bought foreclosed homes in bulk post-crisis saying that it would make it difficult for individual investors in that market to compete. Today’s development marks a recognition of the legitimacy and enduring impact of that business model. Fannie and Freddie are doing this in order to support the rental market and make renting more affordable for renters. More and more households are shifting from home ownership to renting as home ownership is at the lowest level in 50 plus years. Given high amounts of student debt, depleted savings after the financial crisis, and strict lending standards, more people have opted to rent homes. Fannie Mae now chooses to support that market and this is the first step in them doing so.

Over the past few years European investors have been large net buyers of foreign debt. Since the summer of 2013 buyers have been net buyers and those purchases have totaled EUR 3.8tn since then. However between September and November of last year data shows that investors sold EUR 16bn more foreign bonds than they bought, becoming net sellers for the first time in three years. As rates sold off globally European investors pulled their money out of global fixed income products. Additionally as rates backed up in Europe some investors might have brought money back home. That could hurt prices in global fixed income markets, especially in the United States where European investors have been big buyers. Additionally it could reduce downward pressure on the euro. European investors over the last three years have had to sell euro and buy foreign currency to buy foreign bonds. Now that investors are net sellers of foreign bonds that reduces downward pressure on EUR. This comes as yields in the eurozone have increased over the last few months. The 10 year German yield has risen from -0.19% last summer to 0.38% currently. A survey of primary dealers in the United States showed that foreign demand was the largest single factor in driving US yields to record lows. Now that the dynamic is changing it reduces a lot of the downward pressure on U.S. rates.

Tuesday January 24

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