Tuesday June 13

Stock prices rose to record highs today as financials and technology shares both rallied. The S&P 500 rose 0.5% to 2,440 while the Dow Jones rose 0.4% to 21,328. The KBW Bank index rose 0.5% while utilities added 0.1%. Technology shares found a bid which is always encouraging after selling off for two consecutive days. While it was a drastic selloff for some of the big names on Friday it seems to have been a healthy pullback in the shares after they had been bid up in a popular trade over the last few months. Financial shares benefitted from the Treasury releasing its report on suggested regulatory efforts as well as expectations that the Fed will raise interest rates tomorrow. The market for fed funds futures is pricing in virtually a 100% probability that the Fed will raise interest rates tomorrow. Economig data today showed that the PPI was unchanged last month and that the yearly change was 2.4% for headline numbers. That was slightly lower than expected, however core was slightly better than expected. The 2 year Treasury yield rose 2bp to 1.37% on hopes that the Fed will raise interest rates tomorrow. The 10 year Treasury yield was unchanged at 2.21%. Accordingly 2yr vs 10yr bear flattened to 0.84%. The dollar was little changed against peers. USD fell less than 0.1% against EUR to $1.1208. USD rose less than 0.1% against JPY to Y109.99. USD fell 0.1% against GBP to $1.2755. Oil prices were slightly higher today. WTI rose 0.8% to $46.44 and Brent rose 0.9% to $48.70.

As one of his first steps in office Trump passed an executive order calling for lawmakers to make a review of financial regulations and submit suggestions on how to make them better. Yesterday that EO came into fruition as the Treasury put forward a report outlining several changes to the financial regulatory landscape that exists today. The deregulation efforts are intended to free both large and small banks from regulations that have become overly burdensome. The plan put forward by the Treasury calls for changes to how banks make leveraged loans which would better enable them to make risky loans to a wider variety of clients. Additionally it calls for changes to capital and liquidity requirements which would free up a lot of money and make it available for lending again. It also suggests making stress tests less frequent, less burdensome, and necessary for a smaller number of banks. It also proposes changes to the CFPB and takes away some of its authority. This report addressed primarily banks, and further reports on money managers and insurance companies are expected in the future. The Treasury report did not make any efforts to broadly sweep the Volcker Rule officially, however he did say that the Treasury is fine if members of the House and Senate vote to get rid of it.

China’s yield curve remains inverted. A few weeks ago when it went inverted it was between the 5 year and 10 year tenors. The 5 year bond trades infrequently and is therefore exposed to drastic price movements, so that inversion may not be totally reflective of market conditions. The inversion now goes all the way between the 2 and 10 year tenors with the 2 year yielding 3.61% and the 10 year yielding 3.55%. Since those are both actively traded that is a “pure” reflection of market expectations for lower growth and lower inflation over time. As officials in China have drastically tightened short term liquidity in response to excessive leverage and speculation in financial markets, short term rates have increased significantly. At the same time long term rates are being kept down by lower expectations for growth and inflation. The PBoC has recently reiterated an intention to adjust liquidity conditions “not too loose but also not too tight” in an apparent effort to maintain order in the financial system. Chinese markets are known for being unstable in June as a result of technical factors including a seasonal increase in cash demand. That seasonal increase in demand comes from corporate tax payments and banks needing to meet capital requirements.

Year to date US companies have issued a record amount of bonds in foreign currencies. Reverse yankee bond issuance has reached $107bn this year which is the most in that time span on record. Large destination currencies have been euro, Canadian dollars, and British pounds. Large issuances have come from well-known firms such as General Electric and AT&T which tapped the market for $8.7bn and $7.9bn recently. It makes sense for companies issuing large amounts of debt to diversify their sources of funding. It could help them minimize their borrowing costs, and prevent them from overstretching any one market. For large international companies with revenues and expenses internationally it could make sense to have their liabilities be closest to their assets and earnings in those foreign countries. Another big driver of this is low yields around the world. Especially in Europe, where the ECB’s quantitative easing program has sent corporate bond yields to historic lows. When the ECB started buying corporate bonds last year, it was an attractive market for issuers however for companies wanting to swap their funding back to dollars it was expensive. That is because the cross currency basis spiked to as high as 0.62% last year due to expectation for high demand to swap back to dollars. It has since fallen and touched a low of below 0.30%, which makes it more attractive/ less expensive for companies to issue bonds internationally and swap funding back to USD.

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Tuesday June 13

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