It was green on the screen for St. Patrick’s day yesterday following the Fed’s announcement to not move on Wednesday, as market adjusted to a slower Fed ramp for liftoff from ZIRP (Zero Interest Rate Policy), with the S&P up .7%, the DOW up .9%, and the Nasdaq up .2%.  The Chinese government strengthened the yuan exchange rate in reaction to the weaker dollar resulting from the Fed action.  Stocks rose in China, up 1.7% in Shanghai and .8% in Hong Kong, and were up in the rest of Asia, except Japan, where the Nikki 225 fell 1.25%.  As widely cited in the financial press, the DOW broke even for year to date returns yesterday, while the S&P is still down about 2%.  Emerging markets are reacting to a slower Fed, with the MSCI Emerging Markets Index up .9% this morning,  just shy of a 20% rise off the bottom.   The Bloomberg dollar spot index, which tracks 10 major currencies, gained .1% after sliding more than 2% in the last two days.  The dollar gained .3% against the Euro overnight after falling 1.9% in the last three days.   The US equity markets are just opening…up slightly.  Lets hope it holds.

Friday Factoid: Credit Default Swaps

Credit Default Swaps (CDS) in the news again with Valeant Pharmaceuticals.  Valeant, with $31 billion in debt, is under extreme pressure with a raft of bad news, including a possible technical default its bonds, and provides a good case study of CDS.  Here’s a chart of the Valeant Credit Default Swaps, showing a spike this week to over 900 basis points.

But just what is a CDS?  Credit Default Swaps are a way to buy (or sell) insurance on against bond default.  In a CDS contract, the buyer of the swap pays a premium to the seller, similar to an options premium.  In the event of default, the seller pays a predetermined amount of money to the buyer.  CDS are priced in basis points, and the price represents the cost protect a par value of $1 million in bonds.   In the Valeant example, 5 year CDS price rose to 904 bps, which means the buyer would pay the seller $90,400 per year for 5 years to protect $1 million in Valeant bonds.  If the bonds default, the seller pays the buyer the difference between the estimated default value and the par value of the bond.  If the bonds drop to 20 cents on the dollar in default, the seller pays the buyer $800,000 on a $1 million contract.

CDS prices and indices are widely monitor risk levels in the debt markets for both corporate and sovereign bonds.  Like all derivatives, CDS contracts can be used for hedging or speculation.  In the movie The Big Short, financial experts Richard Thaler and Selena Gomez J attempted to explain “synthetic CDO’s”, which are CDS contracts on CDO’s, or Collateralized Debt Obligations.

That’s probably more than you wanted to know about CDS on a Friday morning, so hear is the news:

Markets rise

Asian shares rose overnight pushing the MSCI Asia Pacific (excluding Japan) Index back to December levels, completing a 15 percent rebound from January lows. European shares are little changed, with the Stoxx Europe 600 Index climbing 0.1 percent by 10:00 a.m. London time. There is some evidence that investors remain wary of the European stock rally as money continues to be pulled from ETFs that track German shares, despite the DAX Index's 13 percent recovery from its February low. S&P 500 futures are 0.1 percent higher, following yesterday's upwards move that pushed the index into positive territory for the year. 

Japanese bonds

Japanese government bonds continue to rise, with the yield on the benchmark 2026 notes dropping as low as minus 0.135 percent, a record low and below the deposit rate at the Bank of Japan. Equities in Japan fell for a fourth day, as the continued yen strength keeps pressure on exporters. The yen climbed above 111 to the U.S. dollar overnight before paring some of those those gains to trade at 111.3 to the greenback at 10:20 a.m. London time.

Oil

Oil has maintained its position above $40 a barrel this morning with West Texas Intermediate for April delivery virtually unchanged at $40.22 a barrel at 10:17 a.m. London time. The price rise comes as growing volumes of U.S. exports are "spooking the markets," Amrita Sen, chief oil analyst at consultants Energy Aspects Ltd. in London, said in a note. The recovery also may have played into the decision by the Russian central bank to hold rates unchanged for the fifth meeting in a row this morning.

Brazil

The political crisis in Brazil took yet another turn yesterday when a federal judge issued an injunction suspending the appointment of Luiz Inacio Lula da Silva as President Dilma Rousseff’s chief of staff. With Rousseff already under pressure because of intercepted phone conversations about the Lula appointment, this latest turn only makes things worse for her. Even if an impeachment process begins, it will be a long, drawn out process.

Home prices in China are on fire. Data from China's National Bureau of Statistics says home prices climbed 3.6% year-over-year, making for their fastest acceleration since June 2014. In addition, prices jumped 0.6% nationally in February alone. All of the major cities saw prices rise, with a 56.9% YoY advance in Shenzhen leading the way. Gains in Shanghai (+20.6% YoY) and Beijing (+12.9% YoY) were also robust.
The Bank of Russia kept policy on hold. The Bank of Russia held its key interest rate at 11.00% for a fifth straight meeting. In its statement, the central bank made note of "high" inflation and warned that the recent rebound in oil prices could be temporary. The decision to do nothing was highly anticipated, expected by 35 of 42 economists surveyed by Bloomberg. The Russian ruble is stronger by 0.6% at 67.7207 per dollar.
Hedge funds are shutting down at the fastest pace since the financial crisis. The Financial Times reports that data from Hedge Fund Research shows 979 hedge funds closed in 2015, a 13% jump in closings from 2014. This made last year the worst in terms of hedge fund closings since 2009. Additionally, the data showed that just 183 hedge funds opened in the fourth quarter, down from 269 in the third quarter. This was the lowest number of new hedge funds in a quarter since 2009, the FT says.
TransCanada is making a $13 billion acquisition. The company behind the Keystone pipeline is buying Columbia Pipeline Group for $13 billion, including debt. TransCanada will pay $25.50 a share, making for an 8.5% premium from Thursday's closing price.
JPMorgan announced an increase to stock-buyback program. The bank says it will buy back as much as $1.88 billion worth of stock before the end of the second quarter. According to Reuters, the repurchase program is in addition to the $6.4 billion program that was announced last year. The Federal Reserve's board of governors gave JPMorgan a non-objection.
Valeant's CEO says the company isn't on the verge of bankruptcy. Bloomberg reports that Valeant CEO Michael Pearson sent a memo to employees on Wednesday assuring them the company wasn't on the verge of bankruptcy. The memo came a day after the stock collapsed 51% in response to management's earnings and revenue forecasts, which were well below Wall Street expectations. Shares of Valeant are down about 85% over the past year.
Aéropostale is exploring strategic alternatives. The teen retailer announced an adjusted loss of $0.14 a share, missing the Bloomberg estimate by a penny. Revenue tumbled 16.1% to $498 million, short of the $519.1 million that was expected. The company said it was exploring strategic alternatives, including a possible sale of itself.
Losing the Currency War
It wasn’t that long ago that even the hint of action from most of the major central banks had a powerful effect on their currencies. Not so today. Efforts by many of the world’s central banks to weaken their currencies are failing. Markets have ignored the Bank of Japan’s hints at its monetary-policy meeting this week of more rate cuts to come, and the European Central Bank is facing similar problems. This disconnect could produce more volatility as investors find it harder to predict how markets will react to policy changes. Meanwhile, the Dow Jones Industrial Average turned positive for the year yesterday and U.S. crude oil settled above $40 a barrel, rebounding after a rough start to 2016. Some investors said concerns about slowing global growth have eased in recent weeks, while commodity prices stabilized and the U.S. economy showed signs of improvement.
China U
The huge wave of Chinese students entering American higher education seems beneficial for both sides. The students are clamoring for American credentials, while U.S. schools want their tuition dollars. But on the ground, American campuses are struggling to absorb the rapid and growing influx. Teachers bluntly say a significant portion of international students are ill prepared for an American college education, and resent having to amend their lectures as a result. The unhappiness appears to be mutual. Chinese students are finding themselves separated from their American peers due to their high numbers and language and cultural barriers. One student who came from Beijing to study business at Oregon State University said, “I didn’t expect to go abroad and take classes with so many Chinese people.” See how international students are changing U.S. colleges.
Laughing Stock
Who will be crowned the late-night king or queen of this presidential race? Since the last election there has been a radical changing of the guard among the late-night talk shows. Gone are Jay Leno and David Letterman, and it’s the first presidential scrum without Jon Stewart on “The Daily Show.” Election season is a high-pressure proving ground for the late-night newcomers. The stakes are financial as well as cultural, with revenue from campaign ads pouring in. Relative newcomers Samantha Bee and John Oliver have already made headway, even as the network triad of Jimmy Fallon, Jimmy Kimmel and Stephen Colbert lead in the ratings. There is, of course, no shortage of material. In fact, the challenge for comics this time around may be competing with the real-life behavior of the politicians they lampoon.
Tiffany beat on earnings. The luxury retailer Tiffany & Co. announced earnings of $1.46 a share, outpacing the $1.40 that was expected by the Bloomberg consensus. Revenue fell 5.6% to $1.2 billion, which was in line with forecasts. Tiffany sees full-year earnings per share of at most $3.83, shy of the $3.86 that analysts were hoping for.
Stock markets around the world trade mixed. Overnight, China's Shanghai Composite (+1.7%) led and Japan's Nikkei (-1.3%) lagged. In Europe, Spain's IBEX (+0.7%) paces the advance. S&P 500 futures are up 6.75 points at 2,046.75.

US economic data is light. University of Michigan Consumer Sentiment is due out at 10 a.m. ET, and the Baker Hughes rig count will cross the wires at 1 p.m. ET. The US 10-year yield is down 3 basis points at 1.87%.

Vladimir Putin starts his own rating agency.

Justin Trudeau's message to Wall Street: I am not my father.

Brevan Howard said to cede management of $450 million hedge fund.

About that U.S. manufacturing renaissance...

Stunning global heat wave pushes planet into uncharted territory.

Putin Backs Assad, Says Russian Warplanes Could Redeploy to Syria in Hours

Virtual Pop Stars Set to Take the Stage

From the Fed to the Philippines: Bangladesh’s Stolen Money Trail

How low can you go? In the case of Japanese government bonds, the answer seems to be ... very. Early this morning the yield on the benchmark 10-year JGB reached -0.135 percent, a record low. Moreover, things are starting to get rather topsy turvy, with the 10-year yield falling below the negative deposit rate introduced by the BoJ last month. (Omedetou, Japan. You now have an inverted yield curve.) The most interesting aspect in the recent rally in Japanese government debt are the technical drivers. After years of asset purchases, the Bank of Japan has locked up a sizable portion of the country's outstanding debt market and the bonds that remain in investors’ portfolios seem stubbornly hard to budge. The BoJ’s most recent program to buy JGBs with a maturity of 10-25 years drew bids of just 1.35 times the amount on offer, for instance, down from a bid-to-cover ratio of 3.58 times just last week. With yields already at record lows, and so much debt already socked away on the BoJ’s balance sheet, it does make one wonder what comes next in Japan’s increasingly long monetary policy experiment.

Source: Bloomberg, BI, WSJ, ZeroHedge