Category: Market Action

A day like today needs a little light relief; it seems that the Big Banks’ darling Visa is shocked, shocked, that:

“They [Walmart] are using their size and scale to give themselves an unfair advantage,” it says.

I’ll tell you guys one thing … once some fintech company comes up with a payment mechanism that is reasonably widespread and cheap, I’ll start taking it for PrefLetter. The day can’t come soon enough!

Another good joke – although rather old and too frequently told – is investors’ return expectations:

The average expectation in a recent survey: 9.1 percent. Americans and millennials set the bar highest, at 11.1 percent and 10.2 percent, respectively.

The average stock market yield globally: 3.8 percent. And benchmark interest rates in major developed markets are at 0.5 percent or lower—or negative.

The expectations of financial advisers also appear high, according to the new global investor study by asset manager Schroders. The study, which surveyed 20,000 investors across 28 countries, found that advisers around the globe wanted to generate a minimum of 7.9 percent a year for clients—lower than what the investors wanted but still high given the low interest rates. U.S advisers cited 5 percent as their target for annual investment income.

There’s been a lot of noise lately about housing prices in Vancouver and Toronto; foreign money has come in for a great deal of opprobrium; low mortgage rates and easy credit also take a lot of blame. I contend that another culprit is the lousy returns and extreme volatility experienced in the markets since the turn of the century – why invest in the stock market when you can buy a house? We won’t get rid of that attitude until we see a lot more underwater mortgages … which, unlike American mortgages, have recourse to the borrower.

As noted by Assiduous Reader prefobsessed in the comments to June 15, the day began with a sharp decline of over 2% for TXPR. There was a significant recovery, but the market still ended the day down a lot. As far as I can make out, this resulted from a sharp decline in Treasury yields:

Treasury 10-year note yields fell five basis points to 1.524 percent as of 10:02 a.m. in New York, the lowest level since August 2012, according to Bloomberg Bond Trader data.

This decline was was subsequently reversed:

Treasuries erased gains after 10-year note yields touched the lowest level since 2012, amid shifting bets on the outcome of next week’s U.K. vote on membership in the European Union.

Benchmark 10-year note yields climbed after a U.K. Labor Party lawmaker was killed Thursday, leading to a suspension of campaigning before the June 23 Brexit referendum. Treasuries had gained as part of a rally in global government securities that pushed benchmark 10-year yields in Germany and Japan further below zero.

Demand for Treasuries rose after Federal Reserve Chair Janet Yellen on Wednesday said slow productivity growth and aging societies may depress interest rates, and also cited the risk of Brexit as a reason to keep rates steady. Polls in recent days have shown the “Leave” camp leading. The Guardian newspaper reported police are investigating reports saying the suspect in the U.K. incident had shouted “Britain First,” the name of a group that campaigns against immigration and membership in the EU.

… but nobody told the Canadian preferred share market:

Click for Big

The GOC-5 closed at 0.57% and who knows? Maybe we’re back to the days when all changes in GOC-5 would be reflected in FixedReset prices (with a high negative duration!) as the market attempts to keep yields constant … which makes no sense, but since when is the preferred share market supposed to make sense?

The Fed held the line on policy rates today:

Information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished. Growth in household spending has strengthened. Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened, but business fixed investment has been soft. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

This news, while expected, had immediate effect:

The dollar weakened, touching a 20-month low versus the yen, after the Federal Reserve held off on raising interest rates and suggested the pace of future increases will be slower than previously predicted.

The U.S. currency fell against most of its major peers as policy makers pared back rate-hike expectations, dimming the outlook for policy divergence from increased monetary stimulus in Europe and Japan. The number of officials who see just one increase in 2016 rose to six from one in the previous forecasting round in March, according to projections released by the Federal Open Market Committee.

Yellen is pointing at structural factors:

Yellen in the past has ascribed the low level of rates mainly to lingering headwinds from the financial crisis — tight mortgage credit, for instance — and suggested that they would dissipate over time.

On Wednesday, though, she also pointed to more permanent forces that could depress rates for longer, namely, slow productivity growth and aging societies, in the U.S. and throughout much of the world.

In a press conference after the Fed held policy steady, Yellen spoke of a sense that rates may be depressed by ”factors that are not going to be rapidly disappearing, but will be part of the new normal.”

The potential for Brexit was also mentioned:

Britain’s June 23 referendum on membership of the European Union was also “one of the uncertainties that we discussed and that factored into today’s decision,” Chair Janet Yellen said after the Federal Open Market Committee voted unanimously to leave rates steady at the end of a two-day meeting on Wednesday in Washington.

“It is a decision that could have consequences for economic and financial conditions in global financial markets,” she told a press conference following the meeting. “If it does so, it could have consequences in turn for the U.S. economic outlook that would be a factor in deciding on the appropriate path of policy.”

Fears of Brexit are so strong that the UK government it trotting out its mouthpieces to parrot the party line:

At first, Mark Carney seemed willing to leave the Brexit debate to others.

What followed instead was a bout of verbal intervention that made the Bank of England governor a target of ire by exit proponents and a key figure in the intensifying campaign for Britain to remain in the European Union.

And all this comes on the heels of increasingly negative Euro rates:

The yield on Germany’s 10-year government bund, Europe’s benchmark security, fell below zero for the first time on record, as investors’ seemingly insatiable demand for haven assets created another bond-market milestone.

The nation joined Japan and Switzerland in having 10-year bond yields of less than zero. The plunge in yields, which has been driven by European Central Bank’s policy of negative interest rates and asset purchases, has accelerated amid a weakening global economic outlook and as polls indicate the “Leave” campaign in Britain’s European Union referendum is gaining momentum.
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The German 10-year securities join the more than 40 percent of the $6.4 trillion of euro-region debt that already has yields below zero, according to the Bloomberg Eurozone Sovereign Bond Index, meaning investors who buy the bonds now and hold its to maturity will receive less than they paid.

PerpetualDiscounts now yield 5.42%, equivalent to 7.05% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.85%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 320bp, a widening from the 310bp reported June 8.

Janus Capital introduced a new batch of ETFs today … some old guys might want to overweight them:

It’s easy to imagine the slapping sounds of high-fives when Janus executives conjured up these ticker symbols: SLIM, for the Obesity ETF; OLD, for the Long-Term Care ETF; FITS, for the Health and Fitness ETF; and ORG, for the Organics ETF. Each started trading on Thursday, representing the fund manager’s second set of original equity ETF offerings after entering the space in 2014 with the purchase of VelocityShares.

Assiduous Reader JR reminds me I haven’t posted any drone news in a while … so how about a passenger drone?

Ehang CEO Huazhi Hu began designing the one-seater electric drone a couple of years ago, after two of his pilot friends were killed in plane crashes. He decided that people needed a form of short-to-medium-distance personal air transport that didn’t require them to have a pilot’s license, and that took much of the danger out of low-altitude flight.

The idea behind the Chinese-built 184 is that users will simply get in, power it up, select their destination using a 12-inch touchscreen tablet display, then press the “take-off” button. The drone’s automated flight systems will take over from there, managing tasks such as communication with air traffic control and other aircraft, obstacle avoidance, and of course navigation – it will always choose the fastest yet safest route between its present location and its destination.

Failsafe systems will reportedly take over in the event of malfunctions, plus passengers can get the drone to stop and hover in place if needed.

The company is hoping to start testing this year.

DBRS confirmed Brookfield Office Properties at Pfd-3:

DBRS Limited (DBRS) has confirmed the rating of Brookfield Office Properties Inc.’s (Brookfield or the Company) Senior Unsecured Notes at BBB and its Cumulative Redeemable Preferred Shares, Class AAA at Pfd-3, both with Stable trends. The confirmation acknowledges DBRS’s previous expectation that Brookfield’s coverage ratios would remain at aggressive levels for the current rating category during the re-leasing transition period (2015–2016) at BPNY. The confirmation reflects DBRS’s expectation for a gradual improvement in coverage ratios in 2016, driven by income contributions from leases at BPNY, and that Brookfield will use asset disposition proceeds to reduce debt.
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If Brookfield achieves weaker operating income and/or increased leverage such that the Company fails to meet DBRS’s expectations of EBITDA interest coverage (including capitalized interest) increasing to 1.70x within a year, a negative rating action could occur. Although highly unlikely, a positive rating action would require Brookfield to demonstrate meaningful improvement in operating income and significant deleveraging of its balance sheet.

PerpetualDiscounts now have a yield of 5.38%, equivalent to 6.99% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.9%, so the pre-tax interest-equivalent spread is now about 310bp, narrowing from the 320bp reported June 1.

Jobs, jobs … whoopsy!

The U.S. economy looks to be in danger of losing its main pillar as employers throttled back hiring in May to the lowest level in almost six years.

The slowdown — payrolls rose by 38,000 after a downwardly revised 123,000 in April — raised questions about the ability of consumers to keep spending at a good clip. It also cast doubts on Federal Reserve policy makers’ intentions to raise interest rates soon.
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The deceleration in the labor market was widespread, with industries from construction and manufacturing to temporary-help services cutting workers.
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Unemployment did drop, to an almost nine-year low of 4.7 percent last month from 5 percent in April. But even that was bad news as the decline was mainly because more Americans dropped out of the labor force rather than from an increase in employment.

In a sign that the jobs market may remain weak, the Institute for Supply Management reported that American service providers expanded in May at the slowest pace in more than two years. Its measure of services employment dropped to its lowest since February 2014.
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About the only bright spot in the report was worker pay. Average hourly earnings, rose by 0.2 percent in May after a 0.4 percent gain in April that was a bit stronger than initially reported. Pay increased 2.5 percent over the 12 months ended in May.

This, naturally enough, dampens expectations for a Fed hike:

The argument for a June interest-rate hike from the Federal Reserve has evaporated.

Economists and investors largely agreed that a disappointing employment report for May — the U.S. economy added just 38,000 new jobs — all but eliminated the chance that Fed officials would tighten policy when they meet June 14-15 in Washington, and may make it difficult for them to raise in July.
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Odds of a June hike implied by futures trading, which had risen as high as 34 percent in late May as Fed officials hinted at their eagerness to raise rates, tumbled to just 4 percent following the employment report. The odds are based on prices in federal funds futures contracts.

And, perhaps on a related note, the amount of negative yield debt is increasing:

Negative-yielding government debt has risen above $10tn for the first time, enveloping an increasingly large part of the financial markets after being fuelled by central bank stimulus and a voracious investor appetite for sovereign paper.

The amount of sovereign debt trading with a sub-zero yield climbed 5 per cent in May from a month earlier to $10.4tn, buoyed by rising bond prices in Italy, Japan, Germany and France, according to rating agency Fitch. Yields fall as the price of the underlying bonds climbs.

The ascent of the negative yield, which first affected only the shortest maturing notes from highly rated sovereigns, has encompassed seven-year German Bunds and 10-year Japanese government bonds as both the European Central Bank and Bank of Japan have cut benchmark interest rates and launched bond-buying programmes.

On Wednesday the ECB left its main deposit rate for bank reserves unchanged at minus 0.4 per cent.

Unwinding this easy-money is going to be interesting:

Lurking in the bond market is a $1 trillion reason for the Federal Reserve to go slow on interest-rate increases.

That’s how much bondholders stand to lose if Treasury yields rise unexpectedly by 1 percentage point, according to a Goldman Sachs Group Inc. estimate. A hit of that magnitude would exceed the realized losses since the financial crisis on mortgage bonds without government backing, Goldman Sachs analysts Marty Young and Charles Himmelberg wrote in a note published today.

There’s been some loss of face for the US government’s regulatory extortion squad:

The U.S. government has been made several of these unusual repayments in the aftermath of its historic pursuit of insider trading, which led to 80 convictions, brought down at least five hedge funds and resulted in more than $2 billion in payments from defendants.

Fourteen of those convictions have now been overturned — including two that were struck down by an appeals court in 2014, opening the door for the victors and others to claw back penalties and fines from the Justice Department and the U.S. Securities and Exchange Commission. The government has now handed back more than $40 million in all, including to three individuals whose convictions were overturned and two of the hedge funds where they worked.
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The refunds are among several setbacks for the government recently in its insider-trading crackdown. Earlier this year, an appeals court temporarily released convicted stock trader Douglas Whitman from a California halfway house after he argued that his conduct may not have been illegal, depending on how the U.S. Supreme Court rules in another pending insider-trading case.

Five others convicted of insider trading, including former Goldman Sachs Group Inc. director Rajat Gupta, have sought reviews of their cases.