Tuesday April 11

Stocks fell today as geopolitical concerns weigh on markets. The S&P 500 fell 0.1% to 2,353 and the Dow Jones lost less than 0.1% to 20,651. The KBW Bank index and utilities each fell less than 0.1%. Economic data today showed that job openings rose 2.1% in February according to the JOLTS report. Investors are casting their attention towards geopolitical concerns as tension is building towards Russia as well as North Korea. There are worries that the US could launch additional attacks in Syria and Russia is claiming that the US framed the gas attacks. Trump also had tweets stating he was willing to act unilaterally on North Korea without China. The French political election takes place two weeks from now which could also be weighing on sentiment. Given all of those factors equities and bond yields drifted lower. Equity trading volumes have also been low leading up to the Easter break. The VIX rose to 15.88 at its peak today which was the highest interday number since November. Given geopolitical concerns the two year Treasury yield fell 3bp to 1.24%. THe ten year Treasury yield fell 7bp to 2.30%. Accordingly 2yr vs 10yr bull flattened to 1.06%. The dollar was weaker today given lower rates. USD fell 0.1% against EUR to $1.0606. USD fell 1.2% against JPY to Y109.66 given the flight to quality trade. USD fell 0.6% against GBP to $1.2492. Oil prices rose slightly and gold rose 1.7%. WTI rose 0.4% to $53.29 and Brent rose 0.3% to $56.13.

As part of the reversal of the Trump trade investors are willing to take more duration risk in their portfolios. Long duration bonds sold off after the election and at the start of this calendar year as investors began to reconsider inflation. For example 70 year bonds issued in October by Austria fell by more than 10% in the first two weeks in January. However as investors have reconsidered inflationary pressures some of those fears have reversed and prices have since recovered. Duration on the Agg has increased to the highest level in history at 7.0 which also pushes investors to taking more duration risk as they try to match and outperform the Agg. Jeff Gundlach at DoubleLine recently said that he doesn’t like the current environment since he is getting compensated less for taking more risk. As oil prices remain range bound that will have a dampening effect on inflation as the effects of rising oil prices get stripped out of the inflation calculations. As part of this trade the ten year Treasury yield has fallen 25bp over the last few weeks. Inflows into long term bonds have turned positive this over the last few weeks after being negative for much of the start of the year. At the same time hedge funds and more speculative investors in the market have reversed their short positions on Treasury futures which is a bet on rising interest rates. Long term bonds have outperformed short term bonds over the last month with bonds with 10+ year maturity returning 3.6% and bonds with 1-3 year maturities returning just 1.3%. The downside of this is that as more investors feel the same way it could become a crowded trade if the Fed unwinds the balance sheet or raises interest rates more hawkishly than expected. For now companies are capitalizing on this dynamic as corporations such as Microsoft and AT&T have both issued 40 year bonds. Other investors such as pension funds and insurance companies are using long duration bonds as a hedge on high equity valuations since long duration tends to do well when equities sell off.

Toshiba today made a statement suggesting they may have trouble continuing as a company in light of recent scandals and the bankruptcy of Westinghouse. The company’s shares were down more than 6% after a 6% rally yesterday when Foxconn put in a large bid for the chip-making unit. This warning came along the recent earnings report. According to the statement, “There are material events and conditions that raise substantial doubt about the company’s ability to continue as a going concern.” That makes the sale of the chip-building unit of primary importance since the company needs to raise capital to plug holes in its balance sheet. Its auditors didn’t sign off on the statement and release of financial information which could have ramifications for Toshiba regarding its listing status in Japan. This follows an accounting scandal from 2015 and a $6.3bn writedown on the Westinghouse bankruptcy. Since October Toshiba is down more than 40% while the broader Nikkei is up 11%. The Tokyo stock exchange is reviewing Toshiba’s internal controls after the accounting scandal and the fact that auditors didn’t sign off on the statement will be concerning for them. Its shares could be delisted if internal controls are found to be inadequate or if shareholders equity goes negative for two straight years.

Tuesday April 11

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