Wednesday March 1

Stocks rose today after Trump’s address to Congress even as it seems the Fed is about to raise rates. The S&P 500 rose 1.4% to 2,395 and the Dow Jones added 1.5% to 21,115. The KBW Bank index rose 3.2% while utilities fell 1.1%. Economic data today showed that personal income rose 0.4% last month compared to estimates which called for a 0.3% gain. The PCE Price Index rose 0.4% on the month bringing the Y/Y total to 1.9% which was in line with estimates. The PMI manufacturing index came in at 54.2. The ISM manufacturing index came in strong at 57.7 which was higher than the consensus of 56.4. On that backdrop rates sold off and the dollar strengthened. The two year Treasury yield rose 4bp to 1.30%. The ten year Treasury yield rose 7bp to 2.46%. Accordingly 2yr vs 10yr bear steepened to 1.16%. USD rose 0.3% against EUR to $1.0546. USD rose 0.8% against JPY to Y113.69. USD rose 0.7% against GBP to $1.229. Oil prices and gold fell on the stronger dollar. WTI fell 0.7% to $53.66. Brent fell 0.4% to $56.26.

Markets seem to be responding favorably to Trump’s address to Congress last night since he struck a softer tone than he has had in recent weeks or on the campaign trail. Trump did not spend much time criticizing rivals or calling out the press and took a less divisive approach than he has in the past. He talked about lower taxes or households and business as well as immigration policy and border protection. He still faces road blocks in passing tax policies and needs to convince members from both political parties. Republicans are pushing him to repeal and replace Obamacare and there are also some disagreements on budget issues. He discussed a diverse range of topics including the economy, immigration, terrorism, crime, and health care. He took an America First tone without explicitly saying so. While investors may have liked some more clarity on tax cuts, deregulation, and stimulus the tone seems to have been like enough to push markets higher.

Companies in Germany are facing pension problems that are worse than peers in other countries in contrast to Germany’s reputation as a fiscally conservative nation. German companies aren’t required to set money aside to cover future pension obligations. Given low rates in the country unfunded pension obligations, or the gap between plan assets and obligations has ballooned from around EUR 90bn in 2008 to nearly EUR 200bn currently. At the same time the funding status of pension plans is significantly less for German companies than it is for U.S. companies by more than 20%. Some ratings agencies have taken steps to downgrade credit ratings for companies that have significant unfunded pension liabilities. Two other factors that are making this worse are low rates and demographic trends that mean more workers are retiring and less are entering the workforce. In peer countries such as the U.K. and the U.S. there are regulation surrounding how companies set aside cash. In France pensions for the most part are controlled by the government.

Snap’s IPO is expected to pice and trade this week and demand seems to be strong for the tech company. Investors are now anticipating that Snap will either price at the upper end of the range of $14 to $16 a share or some people expect a price even higher around $17 or $18 per share. According to investors and investment bankers they anticipate that the company will IPO tomorrow. The company is trying to convince investors about user growth, revenue per user, corporate governance issues, and how it seeks to compete with Instagram’s platform. Snap’s target price range would give it a valuation between $19.5bn and $22bn. It will most likely be between the 3rd and 4th largest tech IPO since 2012 behind Alibaba, Facebook, and JD dot com. Investors like these young tech companies and since they don’t come to market too often the deals are usually well subscribed. Goldman Sachs and Morgan Stanley are the lead underwriters of the deal. Snapchat will be looking to avoid the big first day run up in price that Nutanix and Twilio faced last year. Those two companies each rose 131% and 92% respectively and remain at elevated levels.

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Wednesday March 1

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