Monday April 3

Stocks fell to start the week although they did recover some losses from earlier in the session. The S&P 500 fell 0.2% to 2,358 and the Dow Jones fell 0.1% to 20,650. Today the KBW Bank index lost 0.2% while utilities were unchanged. Economic data showed that the PMI Manufacturing index fell from last month’s reading to 53.3 as export demand, inventories, output and hiring all slowed. Input costs did post a strong showing in the report however which reaffirms the inflationary trend. The ISM manufacturing index came in as expected at 57.2. On the political front tension over appointing the Supreme Court Justice could once again be a harbinger for tension in trying to pass future policies. This Friday the NFP report will provide more clues on the employment situation which the Fed will pay close attention to. Automakers fell today as motor vehicle sales data disappointed. Given the cautious tone in markets due to the attack in Russia, Trump’s comments on North Korea and political uncertainty yields fell. The two year Treasury yield fell 2bp to 1.23%. The ten year Treasury yield lost 7bp to 2.32%. Accordingly 2yr vs 10yr bull flattened to 1.10%. USD weakened against EUR and JPY while GBP bucked the trend. USD fell 0.2% against EUR to $1.0674. USD fell 0.4% against JPY to Y110.89. USD rose 0.5% against GBP to $1.2484. USD rose 2.3% against SAR to SAR 13.7384 after S&P cut the country’s credit rating. Oil prices were lower but still finished above the $50 level. WTI fell 0.6% to $50.28 and Brent fell 0.7% to $53.14.

In spite of the decrease in outbound M&A volume from China the M&A environment remains favorable in Europe. Outbound M&A from China to Europe fell 87% in the first quarter however M&A volume still rose overall. The number of deals fell 3.6% however the increase in the value of transactions rose 39% to $322.6bn. Large deals included Reckitt Benckiser – Mead Johnson, J&J – Actelion, and Standard Life – Aberdeen. Political risks in the region have not deterred potential buyers either. The financing environment is attractive as stock markets have performed well and yields in Europe are at historic lows. That means that companies can issue equity and debt to finance acquisitions. Additionally the dollar’s rally against the pound makes it attractive for US companies to buy companies in the UK, and valuations are favorable as well for European M&A activity. The Stoxx Europe 600 index trades at 15.8x P/E compared to 18.1x for the S&P 500. Given those favorable characteristics buyers could come off the sidelines since those conditions won’t all be present much longer. That could also explain why Kraft looked to acquire Unilever ealier this year.

Chinese companies are increasingly looking to raise debt overseas in US markets due to regulatory pressures. This especially applies for companies looking to expand internationally, companies looking to finance acquisitions, or companies in risky sectors of China’s economy. Regulators in China have been making it difficult or outright preventing companies from taking money earned domestically overseas. That presents difficulties for international companies based in China. Additionally China’s regulators have made it difficult for companies in certain sectors, such as real estate, to raise money as they try to curb speculation in credit markets. As a result the value of China’s dollar denominated bonds has increased significantly to $52.6bn in the first quarter. That figure represents a 72% increase from 4Q 2016 and a 400% increase from 1Q 2016. At the same time domestic bond issuance in the first quarter fell 64% from the last year. Companies have been issuing dollar denominated bonds in Hong Kong. Companies that have done this include property developers Evergrande and Lenovo. Additionally much of the issuances have come from banks which could be a leading indicator of further credit expansion from those banks. Given all the uncertainty surrounding the exchange rate between dollars and renminbi, an appreciation in USD could make it more difficult for these issuers to meet obligations.

Rating agency S&P cut South Africa’s credit rating which brings the country out of investment grade territory. The rating was BBB- however it was just cut to BB+. Moody’s will give an opinion on Friday and that is significant because it could force certain institutional investors to sell its debt if they cannot hold speculative grade debt. The outlook on South African credit is negative after Jacob Zuma fired finance minister Pravin Gordhan who was admired by investors. As a result of concerns over the fiscal outlook of the country the South African rand is down 9% to SAR 13.7 over the last five days alone. Business leaders and politicians in the country have criticized the decision to dismiss Gordhan. Zuma has dismissed nine members of his cabinet however so far fund flows haven’t been negatively affected. S&P cited concerns about fiscal and growth outcomes given the dismissal of Gordhan.

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Monday April 3

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