Friday June 16

Stock prices rose slightly to finish off the week. The S&P 500 rose fractionally to 2,433 and the Dow Jones rose 0.1% to 21,384. Over the course of the week those indices were 0.05% and 0.5% higher respectively. Today the KBW Bank index fell 0.2% as the flattening yield curve continues to weigh on financials. The DJ Utility average rose 0.4%. Economic data today showed that both housing starts and permits missed expectations continuing the trend of weaker than expected economic data. Robert Kaplan of the Dallas Fed spoke today and came across as relatively dovish, expressing that the Fed should be cautious going forward when it raises interest rates. Investors seemed to second guess the Fed at towards the end of the week as the dollar eased back after rising Wednesday following the statement. On that backdrop the 2 year Treasury yield fell 4bp to 1.32%. The 10 year Treasury yield fell 1bp to 2.15%. Accordingly 2yr vs 10yr bull steepened to 0.83%. Over the course of the week those yields were 3 and 5bp lower respectively. The dollar was mixed against peers and lower broadly. USD fell 0.4% against EUR to $1.1198. USD rose 0.3% against JPY to Y110.88. USD fell 0.1% against GBP to $1.2778. Oil prices rose modestly following a two day decrease. WTI rose 0.5% to $44.69. Brent rose 0.8% to $47.30.

Hedge funds that use quantitative and systematic methods to make investments have been lagging the market this year. Year to date these types of funds have returned around 1.6%, compared to a 3.5% overall return for hedge funds more broadly and more than 8% for the S&P 500. This comes as the statistical models and strategies they have been using in recent years don’t appear to be weathering these markets as well. Last year those funds had very strong performance and many investors looked to put money to work in those quantitative strategies. Even in spite of weak performance this year investors have still increased their allocations this year in spite of outflows from more traditional hedge fund strategies. One popular strategy that those funds use includes investing based off momentum, and that strategy hasn’t fared very well this year as several trends from the last few years have reversed. It also remains to e seen whether those funds can maintain strong performance when correlations are low and markets are more unpredictable. For investors they may not be dissuaded by poor performance this year as long as the funds aren’t correlated to the overall market.

Investors are beginning to consider whether or not the Fed is raising rates prematurely. To reflect their concerns with the economic outlook, the spread between the 2 and 10 year Treasury has decreased to the lowest level since October and is approaching levels not seen since 2007. That spread has fallen significantly nearly 50bps since the start of the year. While some analysts have pointed out that in the past such a decline could be a harbinger for a material economic decline, one recent suggestion is that might not be as accurate of an indicator anymore given cross border capital flows distorting the picture. Also related to the Fed going full steam ahead on interest rates, the 10 year breakeven rate which is indicative of inflation expectations dropped significantly following the meeting and is now approaching 1.6% which is the lowest since the middle of last year. Expectations can change quickly however, as can be seen from shortly after the presidential election. If Trump is able to garner support for some of his policies then these trends could reverse very quickly.

Central bank officials in Switzerland continue to assert that the Swiss franc is overvalued and they maintain an easing bias in an attempt to weaken the currency. It is debated whether or not the Swiss franc is overvalued. The currency is very strong and is viewed as a haven asset for international investors. With Switzerland being one of the biggest net creditor nations when Swiss investors pull their money back in times of uncertainty it also has the effect of strengthening the currency. However given the country’s strong trade balance of 6% of GDP, a high current account surplus which is more than 6% of GDP, and promising growth outlook some analysts are of the view that the currency’s strength is justified given those fundamentals. Economic growth has remained around 1.5% in recent quarters and is expected to stay around that level, while inflation continues to be muted. At the policy meeting of the SNB this week officials indicated that they would leave short term interest rates at -0.75% in order to make investments in the country less attractive and they would intervene in currency markets as needed to prevent the franc from becoming too strong.

Friday June 16

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