Tuesday May 16

Markets eased back slightly today however the S&P 500 still managed to close above 2,400. The S&P 500 fell less than 0.1% to 2,400 and the Dow Jones fell marginally to 20,979. The KBW Bank index rose 0.5% while utilities lost 0.8%. Economic data today showed that industrial production as well as manufacturing each rose 1.0% last month which was more than expected by a decent margin. Sentiment today could have been driven by a slide in oil prices following yesterday’s strength as well as more political events in DC. If anything the recent political events could reduce some of Trump’s clout in the political arena as he tries to pass tax and healthcare reforms. One of the recent suggestions due to the apparent dislocation between actual uncertainty in financial markets and implied volatility could be that investors aren’t rebalancing their portfolios or making many moves due to the uncertainty and that is keeping volatility low. The two year Treasury yield was once again unchanged at 1.30%. The ten year Treasury yield fell 1bp to 2.33%. Accordingly 2yr vs 10yr bull flattened to 1.02%. The dollar was weaker on the day against peers, the euro continues to benefit as political risk in Europe fades a little. USD fell 1% against EUR to $1.1088. USD fell 0.6% against JPY to Y113.06. USD fell 0.2% against GBP to $1.2917. WTI fell 0.5% to $48.59. Brent fell 0.5% to $51.58.

The PBoC has assumed a slightly softer stance with regards to its recent tightening policies. Over the last few weeks the PBoC has raised short term interest rates and drained money from the financial system in order to reduce excessive financial leverage and speculation. However that has led to tumultuous conditions in financial markets in China, which has sent equity, bond, and commodity prices plunging. For private Chinese companies that makes it difficult for them to access funding and credit they need to grow. The yield on the 10 year Chinese government bond yield has risen from 3.25% at the start of April to around 3.65% currently. The stock market has fallen 5.4% over the last month. Those difficult funding conditions make it less advantageous for small private firms compared to larger, inefficient state-run enterprises. To stem some of those concerns the PBoC injected $24.7bn into the financial system in an attempt to reduce some of the panic. That $24.7bn total is the highest daily amount since early January. The PBoC has also made statements suggesting they wish to limit some of the fallout and disruption from the recent tightening. The softer tone and intention to support markets with an easier stance will likely help the stock market.

For investors and corporations that feel like they are owed money by Venezuela, oil company Citgo is the best asset that the government has to offer. 43 companies are pursuing legal claims against the Venezuelan government relating to expropriation of assets in Venezuela. For some bondholders Venezuela pledged all of the equity in Citgo as an asset. Already Russian oil company Rosneft has claims on the company, however it would not be able to assume ownership of the U.S. company Citgo due to sanctions against Rosneft. Both Democratic and Republican politicians have already submitted bills that hope to make it illegal for Rosneft to gain possession of Citgo. Venezuela has just over $1bn in 1Q 2017 and 3Q 2017 and nearly $4bn due in 2Q and 4Q 2017. Its odds of default within the next 6 months are just under 40% however within 10 years it is a near 100% certainty according to financial markets. Citgo has equity value of $8.3bn as of 2015 however those numbers may be lower now due to dividends paid to Venezuelan state-owned oil company PdVSA. Citgo is the most attractive piece of collateral that Venezula has to offer since it is based in the US and earns money in US dollars.

France issued a 30 year bond today that attracted the highest amount of orders for a bond in French history. The EUR 7bn bond received EUR 31bn in orders and priced with a coupon of 2%. This could be a sign of investors increasing their duration risk in an attempt to find yield in the current environment. They are also increasing credit risk as a French retailer also had strong demand for a bond it issued. LVMH also received EUR 14bn for a EUR 4.5bn issuance that is going to finance the acquisition of Dior. It is possible that officials at the U.S. Treasury are eying the results of long dated bond issuances around the world as they try to gauge whether or not there will be demand for ultra-long maturity Treasury bonds.

Tuesday May 16

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