Category: Market Action

Well, that’s the last day of tax-loss selling, which I believe has played a role in December’s softness. Thanks to two-day settlement, tax-loss season lasted until after Christmas this year!

PerpetualDiscounts now yield 5.31%, equivalent to 6.90% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little over 3.70%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 320bp, a significant widening from the 310bp reported December 20.

Manulife has announced a 2.9-billion hit for 17Q4. Management must be distraught that such an important development had to be announced after the market closed for the Christmas holiday – with no time to publish a press release on their website, darn it! It only made it to Newswire – so I’ll help them out by passing along the word:

Manulife Financial Corp. is preparing to take two charges worth $2.9-billion in its fourth quarter as U.S. tax reforms and a new investment strategy reshapes the business.

The Toronto-based insurer said Friday evening that it would move to sell some private market assets, resulting in a one-time $1-billion hit to profits as the company aims to put capital toward investments that can offer higher returns.

At the same time, Manulife said that U.S. President Donald Trump’s overhaul of the U.S. tax code would result in a second $1.9-billion charge as a result of some accounting changes, but that the move would be beneficial to the company’s business south of the border over time. Both charges will be included in Manulife’s fourth-quarter results, which are set to be released on Feb. 7.
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Over the next year and a half, Manulife plans to sell some of its alternative assets, which are long-term holdings in sectors such as timberland, farmland, infrastructure and energy. Many of these assets are located in the U.S.
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As the alternative assets are sold, about $2-billion in regulatory capital will be freed up at Manulife. But the move will also mean that the company’s core earnings, a metric that strips out some accounting volatility, will be reduced by up to $60-million per year after tax until Manulife is able to put about $1-billion in capital to work in businesses that yield higher returns.

The second non-cash charge of $1.9-billion is an upfront hit related to major tax changes in the U.S. that are also expected to impact banks and other insurers. About one-third of Manulife’s business is in insurance and wealth-management operations in the U.S.

Readers of PrefLetter will be familiar with my long-standing qualms about Manulife’s focus on alternative assets. With respect to the $1.9-billion accounting charge, they have plenty of company:

Hours after the bill signing, announcements started to roll in from some of the world’s biggest companies — with some spectacular numbers. While the bill benefits most companies through a lower rate, it also requires them to recalculate some of the tax positions they may have been holding on their books for years.

Biotechnology company Amgen Inc. said it would take a $6 billion to $6.5 billion charge. Bank of America Corp. plans to take a $3 billion hit, and Credit Suisse Group AG will take a writedown of 2.3 billion Swiss francs ($2.32 billion).

The one-time changes are related mostly to what are known as deferred tax assets that accumulate on balance sheets when companies overpay taxes or take tax losses. On the other side of the ledger, deferred tax liabilities pile up when they’ve underpaid taxes on depreciated assets.

Hey, how ’bout that bond market, eh?:

Benchmark bond yields are headed for the biggest weekly advance since September as investors contemplate prospects for continued economic growth and reduced central bank stimulus.
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The yield on 10-year Treasuries slid 2 basis points Thursday, to 2.48 percent. That’s up from 2.35 percent at the end of last week.

…and Bloomberg supplies a chart of the generic 10-year Treasury yield:

Click for Big

In Canada, the five-year is at 1.86% and the 3-Month Bill has breeched the point at 1.03%.

… and the BoC supplies a chart of GOC-5:

Click for Big

PerpetualDiscounts now yield 5.29%, equivalent to 6.88% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little over 3.75%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 310bp, a significant narrowing from the 320bp reported December 13.

The FOMC hiked the US policy rate 25bp:

Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Averaging through hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, both overall inflation and inflation for items other than food and energy have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricane-related disruptions and rebuilding have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12‑month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/4 to 1‑1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

Voting for the FOMC monetary policy action were Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Patrick Harker; Robert S. Kaplan; Jerome H. Powell; and Randal K. Quarles. Voting against the action were Charles L. Evans and Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.

As always, it’s interesting to read about the dissent, which we may expect to see fleshed out in speeches. The accomplished and confident nature of the FOMC’s members is such a contrast to the pompous declarations we read in Canada!

The implementation note states:

The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during December that exceeds $6 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during December that exceeds $4 billion. Effective in January, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $12 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $8 billion. Small deviations from these amounts for operational reasons are acceptable.

…which is interpreted as:

In another move that could tighten monetary conditions, the Fed confirmed that it would step up the monthly pace of shrinking its balance sheet, as scheduled, to $20 billion beginning in January from $10 billion.

Markets seem to have been hoping for more fire and brimstone:

An improving economic outlook should give the upcoming Jerome Powell-led Fed a free pass to continue along Yellen’s gradualist path toward interest-rate normalization. In a key change to its statement, the Federal Open Market Committee omitted prior language saying it expected the labor market would strengthen further. The dollar and Treasury yields were already falling after the so-called core gauge of U.S. inflation, which excludes food and energy costs, unexpectedly slowed. Yellen said elevated stock prices doesn’t mean equities are overvalued.

“Markets are generally interpreting the meeting as a dovish hike,” said Marvin Loh, senior global market strategist at Bank of New York Mellon Corp. in Boston. “The improved view in 2018 may be driven by tax reform, which will not have a long-lasting impact.”

PerpetualDiscounts now yield 5.30%, equivalent to 6.89% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.70%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 320bp, a slight (and perhaps spurious) widening from the 315bp reported December 6.