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Payden & Rygel: Weekly Market Update
Weekly Market Update

Week ending August 28, 2015

A weekly newsletter providing a synopsis of the latest market and economic news and releases and a recap of the securities markets. Find commentary for a wide range of sectors: US equities, US Treasury, corporate, mortgage, municipal and high-yield bonds, global bonds and currencies, and emerging-market bonds.

  Friday* Last Week Dec. 31
2014
1 Yr Ago
Dow Jones Ind. Avg. 16,610 16,460 17,823 17,080
S&P 500 1,991 1,971 2,059 1,997
Nasdaq 100 4,815 4,706 4,736 4,558
The Russell 2000 1,162 1,157 1,205 1,166
DJ STOXX Europe 363 361 343 341
Nikkei Index 19,136 19,436 17,451 15,460
MSCI EM Index 408 407 436 456
Fed Funds Target 0-0.25% 0-0.25% 0-0.25% 0-0.25%
2-Year US Treasury Yield 0.72% 0.62% 0.67% 0.50%
10-Year US Treasury Yield 2.18% 2.04% 2.17% 2.34%
US$ / Euro 1.12 1.14 1.21 1.32
US$ / British Pound 1.53 1.57 1.56 1.66
Yen / US$ 121.32 122.05 119.78 103.72
Gold ($/oz) $1,131.22 $1,160.95 $1,184.86 $1,289.69
Oil $41.94 $40.24 $53.27 $94.55
*Levels as of 7:53 a.m. PDT


Year to Date (12/31/14 -8/28/15)

Dow Jones Industrial Avg -6.81%  
S&P 500 -3.28%  
NASDAQ 1.66%  
Russell 2000 -3.53%  
MSCI World Index -3.46  
DJ STOXX Europe 600 (euro) 6.05%  
MSCI EM Index -6.49%  
Year to Date (12/31/14 -8/27/15)
90 Day T-Bill 0.02%  
2-Year Treasury 0.73%  
10-Year Treasury 1.17%  
ML High Yield Index -0.22%  
JP Morgan EMBI Global Diversified 0.92%  
JP Morgan Global Hedged 0.56%  

 


Date Report Survey Actual Prior Details
8/26 (US) Durable Goods Orders -0.40% 2.00% 3.40% Despite weak exports, durable orders were strong across sectors.
8/27 (EC) M3 Money Supply YoY 4.90% 5.30% 5.00% Euro area money supply grew at its fastest pace since February 2009.
  (US) GDP Annualized QoQ 3.20% 3.70% 2.30% US GDP was revised upwards driven by business investment, inventories and consumer spending.
  (JN) Natl CPI YoY 0.20% 0.20% 0.40% While still positive, Japanese inflation is dangerously low.

 



Investors spent a week worrying about an economic slowdown in China, which led to turmoil in global markets. While investors were fixated on the 2nd largest economy of the world, data from the third largest economy, or rather a group of economies, largely went unnoticed. The euro area grew by 1.2% year-over-year in the second quarter with Germany maintaining its 1.6% rate from the previous quarter and Spain accelerating to 3.1%. While investors worry a global slowdown will adversely impact euro area exports, the Europeans have had no trouble so far this year in finding destinations for their goods. In fact, their trade balance, or the value of exports minus imports, with non-euro area countries is at a six-month high of €26.4 billion. Lastly, summer is thawing frozen credit, with euro area money supply growth at 5.3% year-over-year, the highest level since March 2009. While the euro area is by no means experiencing robust growth and has a long way to go, it is on a stronger footing and this should not be overlooked.

Treasury Bonds

Treasuries finished lower in price in a week that saw the 10-year note yield trade in a 30 basis point range amid volatile moves in equities and commodities. The curve steepened out almost 16 basis points between the 5-year and 30-year point of the curve which was somewhat counterintuitive to a volatile equity market and new lows in the commodity complex.

Dovish comments from the Fed's Dudley aided to the steepening of the curve and the market's pricing of a September rate hike fell to roughly 24% from a high of over 60% a few weeks prior before moving up slightly. The big movers on the week were off the run 10 and 30 year sectors which got hit hard causing liquidity premiums to spike (for instance, old 10-year notes now trade 1.5 basis points cheap to current 10-years which is implying a 3.5 basis point liquidity premium after adjusting for roll and coupon). Prominent flows this week that dealer desks reported were central banks selling bonds (possibly to repatriate dollars into domestic currencies to pay for intervention) and most asset managers on the sidelines given the volatile moves. The currency dynamic may result in a lesser flight to quality bid than the market would expect in times of historical equity volatility.

The Treasury auctioned approximately $41 billion worth of 10-year note equivalent supply across 2-years, 5-years and 7-years with statistics skewed to the weaker side. The most notable was the 5-year auction which tailed almost 1 basis point with the lowest bid-to-cover since July 2009 while dealers took down a much larger portion of the auction size. Overall a thin and sloppy auction which is most likely due to the recent volatile markets.

Large-Cap Equities

In a tumultuous week of trading, the U.S. equity market managed to recover from one of the worst sell-offs in recent memory to post a solid gain for the week. The negative sentiment in equities, which had been building since China's surprised devaluation of their local currency, and the lack of a directional bias shown by investors for most of this year reached a climactic point, driving aggressive selling in global equities.

The S&P 500 index fell as much as 5% on Monday's open on strong trading volumes, pushing up intra-day volatility to levels last seen in August 2011. However, broad equities remained resilient after better than expected economic indicators and recovering oil prices helped calm investors nerves. The S&P 500 and Dow Jones Industrial Average closed the week up approximately 1%, while the tech-focused NASDAQ Composite jumped 2.4%. Large-cap stocks outperformed small-cap stocks. In terms of style, large-cap growth stocks outperformed large-cap value stocks. The best performing sectors were energy and info tech, while the worst performing sectors were utilities and financials.

In fund flow news, Lipper reported domestic equity mutual funds saw redemptions of $1.35 billion, while non-domestic equity mutual funds saw redemptions of $1.20 billion. When ETFs are included, the magnitude of the risk-off sentiment was even more apparent as investors sold nearly $17.8 billion in global equities. Conversely, money market funds took in $15.23 billion for the week.

Corporate Bonds

Investment grade primary issuance was nonexistent this week after global growth concerns sent equities across the world into a state of panic. The US stock market fell 5.29% by Tuesday only to rebound 6.33% by Friday morning. The week was already expected to be slow because of the late August timeframe. New issue is expected to pick up post Labor Day with an estimated $100-$120 billion for the month of September.

Trading volumes were volatile as the market went from a "wait-and-see" mode early in the week to a busy session later as buyers stepped in to buy at the wides or cover existing shorts. Oil almost breached the $38 mark midweek only to close the week at $45, up 9.37%, putting pressure on spreads. Overall, Metals/Mining were five tighter; energy widened by two. The Corporate Index Option-Adjusted Spread (OAS) finished the week at +165, one wider on the week. Senior financials were nine tighter and subs were eight tighter. Industrials were one basis point tighter and utilities were flat.

Mortgage-Backed Securities

Agency mortgage securities outperformed Treasuries after a series of rollercoaster sessions. Yields were higher by the end of the week as equities staged a comeback rally after looking into the abyss on mini-Black Monday. Mortgage pass-through spreads gapped tighter by five-to-seven basis points but not without volatility.

The current coupon Thirty-year mortgage spread closed at 72 basis points after widening to 82 basis points on Monday. Despite tighter nominal spreads, the recent spike in expected volatility has richened the asset class as the prepayment option became more valuable with primary mortgage rates hovering near 3.875%. Strong housing fundamentals may also alter the supply/demand balance as net issuance is expected to increase over the next few months. Within the market, Ginnie Mae mortgages stabilized compared to conventionals after a tough series of trading days from a lack of Asian demand. In commercial MBS, a lack of trading and new supply helped stabilizing spreads after widening most of August. The 10-year AAA-rated class of a typical conduit CMBS transaction closed at Treasuries plus 129 basis points.

Asset-Backed Securities

John Deere planned to bring the sole ABS deal for the week and quickly decided to put it back on the shelf due to market volatility. Next week appears to be quiet due to month end, and the following week includes Labor Day. The annual ABS EAST conference is set for the week after that, so it may be quite a while before the new issuance calendar returns for ABS. Secondary trading has been muted, but spreads are clearly wider, some near 5-year wides.

There were 10 new CLO deals issued in August, bringing the year-to-date total to $71.5 billion according to S&P. Here too, we are seeing some wider spreads in muted secondary trading.

Municipal Bonds

The municipal market experienced generally higher yields this week with a steepening bias against a backdrop of volatile equity markets resulting in gyrating Treasury markets. At mid-week, the ten year AAA benchmark municipal yield registered in at 2.15% and nearly 99% of its Treasury counterpart. The municipal to Treasury yield is even more attractive farther out the yield curve on a relative value basis as thirty year municipal yields are 106% of their Treasury counterpart.

New issue supply this week was somewhat higher at $10.0 billion compared to $6.5 billion last week. The 2015 weekly average is about $8.5 billion. The largest deals of the week included $2.2 billion New Jersey School Construction bonds and $1.9 billion State of California. New issue supply is higher than last year due to increased refunding volume. Most new issues priced at historically traditional spreads due to the attractiveness of municipals relative to treasuries offset by lackluster mutual fund flows. The $750 million Puerto Ricco Aqueduct and Sewer Authority deal was postponed due to insufficient investor demand amidst debt restructuring talk from San Juan. Next week's negotiated calendar is $2.8 billion led by $1.1 billion Dormitory authority of the State of New York.

Competitive deals saw lackluster sales and most negotiated new issues were priced attractively in order to garner buyer's attention amidst a low interest rate environment. The secondary market was inconsistently bid with most trading in-line with the overall market's weaker tone. Dealer's bids are spotty under current market conditions. The 30 day visible supply is $7.4billion, somewhat lower than average for the year. Longer term, municipal bonds should outperform other fixed markets as relationships are attractive relative to Treasuries.

High-Yield Bonds

US high-yield was higher this week after a week of wild price swings in global equity markets. The BofA Merrill Lynch BB/B cash pay constrained index was up 0.12% this week as spreads cinched tighter by three basis points to an option-adjusted-spread of 484 basis points. The BofA Merrill Lynch BB/B index that excludes utilities and energy was up 0.14% for an OAS of 432 as that spread ticked wider by one basis point. The BofA Merrill Lynch Euro BB/B constrained index was down .07% as the spread of that index tightened by two basis points for an OAS of 396.

The volatility in global equity markets late last week and early this week led to softness in high-yield as leveraged credits traded lower in sympathy with the sell-off in stocks. By mid-week stocks rallied sharply off the recent lows and high-yield moved higher as well. Energy credits found some support as oil surged higher on Thursday, but overall the theme of investors looking to shed exposure to energy, metals and mining continued. CCC's underperformed the broader high-yield market as well as the bias for better quality "safe" assets remained.

Fund flows were negative for the week as would be expected in the risk-off mode of the market during most of the period. AMG reported an outflow of $1.6 billion for the week ending Wednesday, August 26. Considering the ferocity of the selloff in equities, the size of the outflows were to be expected, and appeared to be readily absorbed by the market as trading volumes ran much higher than average for late August. High-yield buyers came back into the market with a vengeance on Thursday as ETF's were seen with offer-wanted-in-competition lists that totaled over $1 billion with ETF's later reporting a daily inflow of $291million.


Global Bonds and Currencies

The sharp sell-off in Chinese equities over the past week and the chain reaction it triggered in markets around the world saw some risk assets experience their sharpest sell-off since the global financial crisis. The mid-week monetary easing by the Chinese Central Bank helped markets stabilize and retrace some of these extreme price actions.

However, global equities and risk assets more generally were still lower on the week, and short-dated interest rates declined as market participants pushed back their expectations of monetary tightening by the US Fed and the Bank of England. Despite this, yields on longer-dated bonds in major developed government bonds rose on the week, leaving yield curves steeper.

Ten-year German bund yields rose by about 12 basis points, broadly in line with US Treasury yields, which jumped by 14 basis points, but slightly underperforming UK Gilts - 10-year Gilt yields rose 10 basis points. Peripheral European spreads to German Bunds, however, were tighter.

Currency markets saw a significant rise in volatility, which was further amplified by low, holiday-related liquidity. Consequently, traditional safe-haven currencies such as the Japanese Yen and the Swiss Franc rose against the major crosses. Early in the week the Euro confirmed its recent status of funding currency and rallied against the US dollar during the sell-off in risk assets, but finished the week lower against the greenback as calmer mood prevailed. Commodity currencies came under renewed pressure as oil and other commodity prices declined. The sensitivity of the Australian economy to changes in commodity prices and its close trading relationship with China and the Asian region weighed on the Australian dollar.

Emerging-Market Bonds

Despite significant volatility, emerging market dollar-pay spreads tightened six basis points to 395 basis points over US Treasuries, while local debt yields increased twelve basis points to 7.01 %. Helped by the late-week recovery in oil prices, the Russian ruble (+6.1%) gained the most versus the dollar, while the South African rand (-2.6%) and the Brazilian real (-2.3%) sold off.

China remained at the center of market attention amid the sharp sell-off and subsequent recovery in global risk assets and a spike in volatility. Chinese equities fell over 15% during the week, sustaining their decline even as the correction in broader equity markets slowed or reversed. Acknowledging the country's weaker growth and lower inflation dynamics, the People's Bank of China announced its latest round of monetary policy easing. The benchmark lending and deposit rates were cut by 25 basis points to 4.6% and 1.75%, respectively, while the reserve requirement ratio was reduced to 18%, from 18.5%. Further steps were taken to liberalize interest rate markets, and deeper rate cuts were implemented for rural areas and small businesses.

After five months of negotiations, Ukraine announced it had reached a deal with a group of its major bondholders to restructure its outstanding sovereign Eurobonds. The agreement calls for a 20% "haircut" to the bonds' value, a four-year maturity extension, and a GDP warrant that pays investors if certain growth benchmarks are met in the future. Despite a strong market reaction to the deal announcement, however, implementation risks for the deal are significant.

Second quarter GDP in Brazil surprised on the downside, with output contracting by 2.6% year-over-year (y/y). Of note, domestic demand (-4.2% y/y) was dragged down by a sharp pullback in investment (-11.9% y/y).

As expected, Turkish President Erdogan called for new parliamentary elections to be held later this year and began the process of forming an interim cabinet. Early polls indicated that Erdogan's AK Party would be unlikely to gain a majority in this second attempt, implying that renewed efforts at coalition-building would be needed.



Date Report Consensus Last
8/31 (IT) CPI EU Harmonized MoM -0.20% -1.90%
9/1 (GE) Unemployment Claims Rate SA 6.40% 6.40%
  (EC) Unemployment Rate 11.10% 11.10%
  (CA) Quarterly GDP Annualized -0.90% -0.60%
  (CA) RBC Canadian Manufacturing PMI -- 50.8
  (US) Markit US Manufacturing PMI 52.9 52.9
  (US) ISM Manufacturing 52.8 52.7
9/2 (EC) PPI YoY -2.10% -2.20%
  (US) ADP Employment Change 200K 185K
  (US) Nonfarm Productivity 2.50% 1.30%
9/3 (EC) Retail Sales YoY 2.00% 1.20%
  (EC) ECB Main Refinancing Rate 0.05% -0.05%
  (EC) ECB Deposit Facility Rate -0.20&% -0.20%
  (US) Initial Jobless Claims 273K 271K
  (US) ISM Non-Manf. Composite 58.3 60.3
  (RU) CPI YoY 15.60% 15.60%
9/4 (US) Change in Nonfarm Payrolls 220K 215K
  (CA) Unemployment Rate 6.80% 6.80%
  (US) Change in Private Payrolls 215K 210K
  (US) Unemployment Rate 5.20% 5.30%
  (US) Average Hourly Earnings YoY 2.10% 2.10%
  (US) Average Weekly Hours All Employees 34.5 34.6



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