Thursday February 9

Stocks rose today as investors are optimistic that Trump will cut corporate taxes. The S&P 500 and the Dow Jones each rose 0.6% to 2,307 and 20,172 respectively. The KBW Bank index rose 1.6% while utilties fell 0.8%. Data today showed that jobless claims were extremely low and came in at 234k which was below consensus. Trump said that a “phenomenal” tax announcement within the next few weeks should be expected which was a big tailwind for stocks today. The two year Treasury yield rose 4bp to 1.19%. The ten year rose 6bp to 2.40%. Accordingly 2yr vs 10yr bear steepened to 1.21%. The dollar strengthened on the day against peers. USD rose 0.4% against EUR to $1.0661. USD rose 1.2% against JPY to Y113.22 ahead of a meeting between Trump and Shinzo Abe this weekend. USD rose 0.3% against GBP to $1.25. Oil prices continue to remain stable in spite of the fact that inventories are at record highs. WTI rose 1.4% to $53.05. Brent rose 1% to $55.66.

A practice that is known as entrusted lending in China is taking off in recent years which is contributing to risks in that country. Entrusted lending falls under the umbrella of what is referred to as shadow banking. Shadow banking refers to financial activity taking place outside the traditional financial sector. In this case entrusted lending entails a situation in which one company makes a loan to another company. These types of company-to-company loans rose 20% last year and the total amount outstanding is more than twice the size of Wells Fargo’s loan book. After China’s bond market sold off companies stepped in to make loans to other businesses when banks would not. These types of loans typically offer interest rates as high as 20% since they go to companies who are not able to attain traditional sources of financing. It contributes to the problem of excessive private debt in China which some analysts estimate is as high as 168% of GDP. In some cases companies in stagnant industries such as coal and smelting businesses are essentially turning into lenders to earn profits while their traditional operations struggle. In other situations these loans are being funneled to companies to sectors with overcapacity that the government is trying to reduce support for. Since 2004 company to company lending has risen from less than 1 trillion yuan to more than 13 trillion yuan currently. Banks act as middlemen in these transactions in exchange for a fee however they don’t do any of the credit analysis. In most cases the companies involved use their own credit analysis and many analysts are concerned that they are by no means capable of assessing credit risks.

Donald Trump and Shinzo Abe are set to meet this weekend over a golf game and the outcome could have implications for the dollar yen exchange rate. The yen has appreciated more than 4% this year against USD as the Trump trade has eased back slightly. Trump in the past has criticized Japan for benefitting from a weak currency as a result of their zero/ negative interest rate policies. Data from the CFTC shows that for much of last year speculative accounts were bullish on the yen however since the election they have turned net bearish. Nevertheless over the last few weeks net short positions have been decreasing possibly suggesting another change of heart. Exchange rate policies are likely to be on the agenda when the two meet as economists grow concerned about competitive devaluations. Many countries including the eurozone and Japan have been weakening their currencies in order to benefit their respective economies. Just this last week New Zealand said a weaker NZD was necessary to maintain growth. Nevertheless there are a lot of headwinds on JPY as the Fed looks to raise interest rates this year and the BoJ looks to keep their rates at zero. That widening rate differential could put increasing pressures on JPY. Corporate tax cuts, high fiscal spending out of the Trump administration could both push the Fed to raise interest rates which would exacerbate the debate. If Trump tries to label Japan a currency manipulator or he makes trade deals contingent on no JPY or JGB intervention the yen could appreciate against USD. Data this week showed that Japan is the second largest contributor to the U.S. trade deficit which will add fuel to Trump’s fire.

Tension between the eurozone, Greece, and the IMF is rising. This time Greece and the EU are criticizing the IMF’s recent report that was issued on Greece’s dismal financial situation. The two year yield rose 52bp to 10.02% and rose another 21bp after hours. The IMF recently said that Greece needs large debt relief and less fiscal austerity in order for the fund to participate in future bailouts. Germany and other eurozone creditors are in disagreement about this. Greece is waiting for an additional EUR 7bn from bailout lenders in order to prevent another dire financial situation. The IMF is refusing to participate unless debt relief is provided. That is being met with stiff resistance. A solution will likely need to be met before July when Greece has a multi-billion euro maturity due. This is coming a recurring pattern with Greece as it always gets to the edge of the cliff before some last minute agreement is met. It is a precarious situation given the rising concerns of political instability in Europe. Representatives of the EU have also criticized the IMF’s reports saying that it is overstating the extent of Greece’s problems.

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Thursday February 9

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