Tuesday May 23

Stock prices rose for the fourth consecutive day. The S&P 500 and the Dow Jones rose 0.2% to 2,398 and 20,937 respectively. The KBW Bank index led the way with a 1.3% gain while utilities were in line with the market. Economic data today showed that the PMI Composite Flash came in above expectations due to strength in the services sector offsetting weakness in manufacturing. Neel Kashkari spoke today and came across as dovish saying that he is concerned about the decline in core inflation and isn’t sure if we are at full employment yet. That could have contributed to some of the increase in equities today, coupled with another increase in oil prices ahead of Opec’s meeting Thursday. Trump released his budget outline which called for higher infrastructure and defense spending and cuts to healthcare and food assistance. It is anticipated that this is unlikely to be passed by Congress in the current form which is why markets didn’t respond much. Ahead of the release of the FOMC minutes Treasury yields rose today. The two year Treasury yield rose 3bp to 1.31%. The ten year Treasury yield rose 4bp to 2.29%. Accordingly 2yr vs 10yr finished at 0.97%. USD rose 0.5% against EUR to $1.1178. USD rose 0.5% against JPY to Y111.78. USD rose 0.3% against GBP to $1.2964. WTI rose 0.8% to $51.52 and Brent rose 0.5% to $54.15.

Although computers have been gaining ground in the financial industry over recent decades, in the insurance world humans still have the upper hand. For simple and standardized insurance policies such as auto, home, and small business computer algorithms are able to accurately price policies. However for more complex policies, particularly in commercial insurance, a human touch is needed since policies are more bespoke and claims are less frequent so there is much less data to work with. For those types of policies which could cover events such as medical malpractice lawsuits, hurricane damages, corporate automobile accidents, cyber hacking, contaminated products, fires, and offshore drilling accidents, insurance companies do use algorithms to price policies however humans still adjust prices up or down using their discretion. Pricing those policies is increasingly data driven utilizing information from sensors in factories, devices worn by workers, employee sentiment taken from social media, medical records, criminal records, satellite imagery, proximity to fire hydrants and others. On more bespoke policies human technical underwriters can and do offer final say on how the policy should be priced. Regardless insurance companies are still investing heavily into machine learning and artificial intelligence to bulk up their algorithms. According to Accenture 37% of 550 insurance companies plan to invest “extensively” in machine learning and 44% plan to invest “moderately”. Insurance companies such as AIG have hired hundreds of scientists and PhDs to analyze data and assist in pricing insurance policies.

Blackstone is entering into the nontraded REIT space in a way that represents a shift in the way retail investors can access real estate investing. REITS have fallen out of favor with some retail investors due to their volatility which is attributed to correlations with interest rates. Additionally some REITs charge high fees, with up front fees as high as 15% in some cases. Analysts warn of a conflict of interest as REIT managers don’t receive fees that are related to their performance, and therefore they make money in good years and bad years. Blackstone’s entry into this market addresses both of those concerns. First the company will charge fees that are related to the nontraded REITs performance. Second since it is not traded on the open market it is not exposed to as much volatility as other normal REITs are. Blackstone’s fund has been popular and has raised more than $750mm year to date which is 41% of all the funds raised by nontraded REITs this year. As Blackstone successfully moves into this space, it could prompt other asset managers to do the same thing since Blackstone is a leader in the industry. Blackstone’s real estate business has grown significantly in recent years as real estate AUM has risen 29% since 2014 including $66bn that has been returned to investors in that time frame.

Trading volumes in Greek bonds are at very low levels which will make it difficult for the Greek government to issue new bonds. Although yields on Greek bonds have fallen and the debt has in theory performed very well over the last year, nobody really owns it so much of those gains aren’t realized by actual investors. The country has around EUR 300bn in debt outstanding however only EUR 36bn is owned by private investors. The rest is held by European institutions such as the IMF and the European Commission. Only EUR 160mm in Greek government bonds has changed hands this year which is an extraordinarily low level. Between 2001 and 2007 under normal conditions in the Greek bond market, that amount traded every half hour on average. The bid/ ask on Greek bonds is 14.3bp which is by far the widest out of any EU country. For Portugal and Germany the bid/ask spread is 5.3bp and 0.3bp respectively. In 2014 EUR 10bn in Greek debt was traded however that dropped off sharply and was only EUR 1bn in 2015 as the country’s situation with creditors worsened. Before the 2008 financial crisis EUR 630bn traded each year on average. Those thin trading volumes make Greek bonds more volatile, and it makes it difficult for the country to return to the debt market as it hopes to do so. If the ECB decides to include Greek debt under its quantitative easing purchases that could change things however that seems a long way off.

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Tuesday May 23

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