Monday February 13

Stocks rose today starting the week out on a strong note. The S&P 500 rose 0.5% to 2,328 and the Dow Jones rose 0.7% to 20,412. Financials rose 1.2% while utilities added 0.3%. Shinzo Abe and Donald Trump met over the weekend, and while heading into the weekend there was some concern that there could be talks of trade wars investors took optimism from the fact the meeting appeared to have gone smoothly. Additionally lingering optimism from the tax announcement last week and reports suggesting Steve Mnuchin could be confirmed soon lead investors to believe Trump’s policies are a nearing possibility. The 2 year Treasury rose 2bp to 1.21%. The 10 year Treasury rose 2bp to 2.43%. 2yr vs 10yr bear steepened to 1.22%. USD rose 0.4% against EUR to $1.0599. USD rose 0.5% against JPY to Y113.73. USD fell 0.3% against GBP to $1.2523. Oil prices fell perhaps hurt by the rising dollar. WTI fell 1.8% to $52.90. Brent fell 1.9% to $55.60.

Investors and asset managers who trade in emerging market stocks and bonds used to use the Mexican peso as a currency hedge for their portfolios. Many emerging market currencies are controlled by their respective governments or central banks, and as a result it can be difficult to hedge currency exposure in some markets. However the Mexican peso swings with fluctuations in U.S. interest rates, changes in commodity prices, and global fund flows. Those characteristics make the peso correlated with many other emerging market currencies. The peso it a relatively liquid market compared to other emerging markets, and as a result of all of those factors investors used to sell pesos to hedge positions held in other countries with similar characteristics. However since Trump has been elected the peso has been trading closely with news of walls and protectionist policies. Those are risks that other emerging market countries don’t face as directly as Mexico so as a result the correlations have broken down. Therefore investors are beginning to not use the peso as a currency hedge for emerging market portfolios. In the absence of a viable alternative that could lessen the attractiveness of emerging market investments. The central bank in Mexico has also been raising interest rates which make it more expensive to short the peso. Data has shown that daily average trading volumes in the peso have fallen to $97bn last year from $135bn in 2013 as a result of that shift. Asset managers are struggling to find the next best currency to hedge with and some suggestions have been Russian ruble, South African rand, or Brazilian real.

Although the consensus has shifted away from “lower to longer” to higher rates some money managers and research analysts still think rates are destined to stay low. After Trump was elected the market focused on fiscal stimulus and a widening deficit as developments that will push interest rates higher. The yield on ten year Treasuries has risen from around 1.8% at the time of the election to around 2.45% currently. At the same time the 10 year Treasury yield forecast has risen steadily and is now projected to hit 3.0% by the start of 2018. The last time bonds were in an extended bear market was between 1950 and the early 1980s. Bill Gross says that without monetary easing from central banks in Europe and Japan the 10 year would quickly rise to 3.5%. However the opposing view is that interest rates will stay low in an era of low productivity, low growth, low inflation and economies dependent on monetary easing.

Apple’s share price today rose to a record high of $133.29 bringing the market cap to $700bn. That is more than $120bn higher than Google which is the second largest company. Apple’s stock price has risen on the back of forward guidance given by Tim Cook who said last month that he is aiming to bring services revenue to $24.35bn by 2021. Apple also holds more than $200bn in cash overseas that it expects to repatriate at some point to spend on returning money to shareholders and M&A activity. However the reason for the recent increase is the expectation that the iPhone that will be released in September will be a big seller. It will be the tenth anniversary of the original iPhone release and as a result both analysts and customers have high hopes for the results. Some of the changes that are being tossed around include new screen technology, lighter weight, thinner, and wireless charging. Some analysts are also anticipating that Apple will raise the price of the iPhone. A majority of the iPhones outstanding are iPhone 6’s so customers may choose to upgrade once the anniversary edition is available. Nevertheless the fact that Apple is so secretive about its plans makes it a high risk gamble for investors. Apple’s share price typically tends to increase between the time when the new phone is announced and when the phone starts selling.

Monday February 13

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