Friday May 26

Stocks finish the week at record highs. The S&P 500 and the Dow Jones were each fractionally changed today and finished at 2,415 and 21,080 respectively. Over the course of the week those indices were 1.4% and 1.3% higher respectively. This comes as investors were willing to look past political uncertainty that plagued markets in the week prior. Today the KBW Bank index fell 0.3% while utilities were unchanged. The VIX continued its path lower and finished at 9.81. Economic data today showed that durable goods orders weren’t great. The headline number missed expectations and the core number showed a 0.4% decline compared to estimates which called for a 0.4% gain. Additionally 1Q GDP was revised higher to a 1.2% annualized rate which was higher than expected. That could suggest to investors that the Fed will remain on track to raise interest rates in June. In the U.S. the 2 year yield was unchanged at 1.30%. The 10 year yield fell 1bp to 2.25%. Accordingly 2yr vs 10yr flattened again to 0.95%. Over the course of the week the 2 year and 10 year yields were 2 and 1bp higher respectively. The dollar was mixed on the day against peers. USD rose 0.3% against EUR to $1.1182. USD fell 0.5% against JPY to Y111.34. USD rose 1.1% against GBP to $1.2803 after polls in the UK showed that the political election in June is closer than previously thought. A loss for Theresa May could lead to a much harder Brexit which would send GBP lower. Oil prices rebounded after a sharp selloff yesterday. WTI rose 2% to $49.87. Brent rose 1.5% to $52.21.

NYSE is looking to change some of its rules surrounding the direct listing offering in an attempt to attract more IPOs from large private tech companies such as Spotify. Currently based on its own rules the NYSE requires that companies have at least $100mm worth of equity after the direct listing is completed. To determine whether companies meet this threshold NYSE takes the lesser of a third party valuation and the companies last value when it changed hands in the private market. Based on the NYSE’s definition of a private market per its own rules, Spotify and other tech companies wouldn’t meet the threshold. Instead the NYSE is applying to the Securities and Exchange Commission to just have to use the third party valuation. This is in an effort to better compete with Nasdaq for IPOs specifically. Since 2006 six companies have completed direct listings with Nasdaq while none have done so with NYSE. NYSE was able to successfully attract the business of the Snap IPO and it hopes to be able to do so with companies such as Spotify, AirBnB and other prominent private companies. While Spotify is already planning to go with NYSE, analysts believe that AirBnB is closely watching Spotify’s process and may choose a similar route if the IPO goes well.

Investors are concerned about a lack of transparency in China’s currency and equity markets. Following Moody’s action to downgrade China’s credit rating earlier this week, many investors and analysts point to a “show of strength” in China’s currency and equity markets on behalf of the PBoC. The yuan and equities in China have risen strongly over the last two days which has led many to believe that the PBoC is directing state owned banks to buy in markets to prop up prices. The PBoC also announced that it was going to change the manner in which is sets the yuan’s value each day by adding a “countercyclical” component to the methodology. It is unclear what that means but it is generally understood that it is intended to reduce fluctuations against the dollar. The PBoC wants to keep the yuan steady against the dollar for political reasons later this year and it is doing so by restricting capital outflows and by raising short term interest rates. As China’s currency markets become more state-driven and less driven by market forces, it goes against their intentions from a few years ago when officials said they would make the currency fluctuate more in line with market forces. The uncertainty in these markets makes it less attractive for traditional international investors, who want predictability and transparency when they are putting money internationally. As the PBoC has linked the yuan with the dollar fluctuations in the pair have decreased and implied volatility has reached notable lows. If the dollar appreciates this could become an expensive strategy for the PBoC to sustain.

Friday May 26

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