Tuesday May 2

Stocks rose slightly today as investors look ahead to the FOMC meeting tomorrow and employment data on Friday. The S&P 500 rose 0.1% to 2,391 and the Dow Jones rose 0.2% to 20,949. The KBW Bank index fell 0.4% while utilities rose by 0.3%. Stock prices rose today in spite of a renewed sharp selloff in oil prices. The yield curve flattened ahead of the FOMC meeting tomorrow. The two year Treasury yield rose 1bp to 1.28%. The ten year Treasury yield fell 3bp to 2.29%. Accordingly 2yr vs 10yr bull flattened to 1.01%. The dollar was mixed on the day against peers. USD fell 0.3% against EUR to $1.0928. USD rose 0.2% against JPY to Y112.03. USD fell 0.4% against GBP to $1.2934. Oil prices experienced a sharp selloff as there are continued concerns about falling demand in the US. WTI fell 2.5% to $47.62. Brent fell 2.2% to $50.41.

Greece reached an austerity deal with creditors that will keep the lights on in the country past this summer. Greece has three payments ranging from EUR 1.4bn to 1.6bn over the next few months, and without this agreement and the EUR 7bn it released in bailout funds the country would have been insolvent by mid summer. The money released today is part of the EUR 86bn bailout package provided by Germany and other eurozone creditors. Over the last seven years Greece’s economy has contracted 25% which amounts to an economic depression as severe as the Great Depression in the United States except longer in Greece. Alexis Tsipras is now giving in some concessions and appears willing to implement sharp fiscal austerity in exchange for debt restructuring from the creditors. Creditor nations such as Germany however may be skeptical to provide debt relief for Greece since it is an election year and political risk in the region is high enough already. Greek officials hope that they will be able to return to capital markets at some point, and that debt restructuring will make Greek bonds eligible for purchase in the ECB’s QE program. Greece wants its debt to be extended in maturity with lower payments, which could make it eligible. The ECB does not buy debt that it sees as unsustainable. If the ECB starts buying Greek bonds that would allow the country to return to capital markets which would benefit Greek banks and corporations in general. Greek banks are struggling as 45% of loans outstanding are non-performing. Private investors have already returned for distressed opportunities recently but in order for more investment to flow into the country more reforms and support from institutions like the IMF and ECB is needed. The two year Greek bond yield today fell 48bp to 5.93%.

Goldman Sachs is increasing its focus and efforts towards more retail banking and traditional commercial banking activity. Historically Goldman Sachs has specialized in trading and investment banking activities. Within investment banking it has focused on providing advice to companies looking to sell themselves to private equity firms or other strategic acquirers. Although Goldman Sachs took on the commercial bank designation after the financial crisis at regulatory gunpoint for years it didn’t use the designation. In that way the bank felt it was being regulated as a commercial bank but not experiencing the benefits of being a commercial bank. That dilemma, along with falling revenues in their traditional lines of business are forcing the company to diversify. Investors currently are rewarding diversified banks under the idea that they can better withstand a broader range of economic and financial market conditions. On the retail side GS has been lending against houses, artwork, kitchen remodels, and refinancing credit card debt on its Marcus platform. On the corporate side GS has been opening revolvers with companies and financing corporate takeovers instead of being on the other end of that transaction. Since GS balance sheet isn’t as large as other commercial banks in the past it steered clear of arranging financing for such deals. It missed out on large revenue opportunities since financing those deals is more lucrative than advising the seller. Additionally in the revolver space it previously steered clear of those deals because they are uninteresting and not really profitable for banks because companies typically draw down on those in times of distress. However now GS is using it as a way to curry favor with clients and hopefully to get on more lucrative deals in other areas of the bank. Loans outstanding have been on the rise from less than $50bn in 2010 to $95bn at the end of 2016.

Argentina has been a popular destination for the carry trade although that may be changing for investors as the government adopts a new monetary policy stance. Last month the central bank in Argentina increased short term interest rates by 150bp to 26.25%. Investors piled in for the carry trade by purchasing central bank debt instruments with maturities less than 30 days. Short term interest rates in Argentina are nearly 10bp higher than the next lowest country which is Egypt around 15%. Historically Argentina boasted high interest rates along with an artifically strong currency due to an official peg. The Argentine government is in some ways reliant on foreign investment since tax evasion is high and savings rates in the country are low. The days of the peg are gone, however investors have still been looking towards the currency for carry trades due to seasonal and technical reasons. A strong harvest season could bring capital inflows, along with the second largest tax amnesty ever on record in the world both could support the peso in the short term for the carry trade. However the peso’s days are numbered. The peso’s strength is leading to a widening current account deficit and fiscal deficit. The central bank announced that it was going to increase foreign reserves to 10-15% of GDP. That would require the central bank to increase foreign reserves by $44.5bn to $92.1bn. That would mean the central bank would have to buy dollars and sell pesos which is bearish for the peso and bad for investors in the carry trade.

Tuesday May 2

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