Friday March 17

Stocks fell today finishing the week on weaker footing. The S&P 500 and the Dow Jones each fell 0.1% to 2,378 and 20,914 respectively. Over the course of the week the S&P 500 was 0.2% higher and the Dow was fractionally lower. Today the KBW Bank index lost 1.1% while utilities rose 0.5%. Economic data today showed that industrial production was unchanged on the month versus estimates which called for a 0.2% gain. Manufacturing was 0.1% higher than expected at 0.5% and both prior production and manufacturing numbers were revised upward. Additionally consumer sentiment was strong and slightly higher than expected. The two year Treasury yield fell 3bp to 1.31%. The ten year Treasury fell 3bp as well to 2.50%. Accordingly 2yr vs 10yr was unchanged at 1.19%. Over the course of the week the 2yr and 10yr were 3 and 7bp respectively. The dollar was mixed on the day against peers. USD rose 0.3% against EUR to $1.0737. USD fell 0.5% against JPY to Y112.74. USD fell 0.3% against GBP to $1.2395 as the point continued strength after the BoE yesterday. Oil prices were roughly flat today and finished stronger on the week. WTI finished at $48.73 and Brent finished at $51.74.

In spite of various investor concerns about China, including an imminent credit crisis and restrictions on pulling money out of the country, investors have shown quite the appetite for Chinese bonds. Capital inflows into the Chinese bond market reached $155bn at the end of February which marks a 53% increase from last year. This comes as Chinese regulators have been trying to make the market more friendly towards international investors by allowing them to hedge foreign exchange risks as well buy bonds more easily. Foreign investors are mostly holding Chinese government bonds as opposed to corporate bonds or commercial paper. It is expected that within the next five years investors with a global and/ or emerging market mandate will have accumulated a position of 5-10% in Chinese bonds. Over that time period analysts expect an additional $250bn of capital inflows into China’s bond market. That could put pressure on index providers to include Chinese bonds in global indices that track a variety of markets. That would be a very welcome move for the perspective of the Chinese since it would lead to a deluge of capital inflows from investors trying to match the index more closely. Citi this month decided to include China’s bonds in three sub-indices that it manages which could be precursor for things to come. The indices that really matter for China would be Barclays Global Aggregate and the Emerging Market Local Currency Government bonds. Barclays said that it would include variants of those indices that include China but would leave the original indices unchanged for now.

The Canada Goose IPO yesterday was met with strong demand from investors. The issue priced at $12.78 and popped 26% upon opening to $16.08, echoing a strong reception for the Snap IPO. The rise in price gave the company a market valuation of $1.7bn. At one point shares had risen by 44% to $18.40. With two IPOs performing strongly in recent weeks that could encourage other companies to follow suit this year. After a bad year in 2016 for IPOs that is welcome news for investment banks that rely on that business. For asset managers looking for new supply that is also a good sign. Research analysts have attributed the popping to high demand from retail investors since they recognize the name. Canada Goose would be classified most likely as a consumer discretionary company, and while many consumer retail companies have not been doing well lately Canada Goose looks to buck the trend since it is still in a growth stage. The company was founded in 1957 and until recently only catered to an audience that used its products for performance purposes. In the last few years however the company has grown popular in urban centers and has created a new category for premium outerwear. Canada Goose’s revenue 42% last year. For Bain Capital which invested in the company in 2013 this is a great liquidation opportunity, which bought in at a valuation estimated to be $250mm. It is also interesting that PETA invested in the IPO saying that it will use its influence to pressure Canada Goose over use of materials. That is an interesting propositions since the equity issued yesterday holds less voting rights than those of already existing shareholders. The company designs and manufactures its products in the United States or Europe and its factory in Toronto only has 100 employees. It’s ability to maintain this authenticity is integral to its success as it tries to expand as a public company.

On a similar note Mulesoft, which until today was one of the tech unicorns went public and also experienced a pop. After the IPO priced at $17 per share the stock opened trading at $24.25 which continues the trend of strong IPO performances on the first day of trading. It is likely that asset managers are liking the new supply after a very slow year last year. Mulesoft is expected to be less volatile than Snap or Canada Goose since it is a name that is not widely recognized with retail investors. The strong performance could encourage other private companies to go public this year.

Overnight repo rates continue to lag below the Fed funds rate which highlights structural elements of the repo market that are going on right now. With the Fed funds rate ranging between 0.75% and 1% the effective rate is currently 0.91%. After the Fed raised interest rates on Wednesday overnight repo rates rose to just 0.75% which presents a 16bp gap between the repo rate and the Fed funds rate. As a result of money market reforms as well as low supply of T-bills due to the debt ceiling, there is high demand for short term T-bills right now. A repo transaction involves one investor receiving a cash loan and using a Treasury as collateral. When the investor pays back the loan the difference between the cash he received and the cash he pays back constitutes the repo rate. Since Treasuries are in high demand the entities on the other end of that transaction are willing to receive a lower repo rate since they like holding the collateral. The 16bp gap between the repo rate and the Fed funds rate is in line with levels throughout this year.

Friday March 17

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