This Week in Corporate Finance (11/29/13)

As we wrap up the eleventh month of the year, the optimism continues to build for 2014. The market continues to debate when the Fed will begin to “taper”, but it’s now a matter of “when” rather than “if” in the coming months, barring some unforeseen event (a major caveat).
 

US Treasuries lost a bit of their “safe-harbor” premium and suffered their first monthly loss since August; only the 2-year note’s yield was lower. For the month, the 2-year note yield was down -3bps to 28bps; the 5-year note yield was up +11bps to 1.37% (after being as high as 1.45%); the 10-year note yield was up +26bps to 2.74% (after being as high as 2.79%); and the 30-year bond yield was up +21bps to 3.81%.

 

Over the past year, the yield curve has steepened significantly. The 2-year yield is up +3bps; the 5-year note yield is up +74bps; the 10-year note yield is up +114bps; and the 30-year bond yield is +103bps.It is interesting to note that T-bill yields are actually lower by -5 to -3bps over the same time period.

 

The stock market continues to reflect the growing optimism on the part of investors. The Dow reached a new all-time high of 16,174.51 (up +23.53% over the past year); the S&P 500 climbed to its new all-time high of 1,813.55 (up +27.53% over the past twelve months); and the NASDAQ hit a new thirteen-year high of 4,069.70 (up +34.79% over the past 365 days). In Germany, the DAX touched a new all-time high of 9,424.62 (up +27.08% since November 2012) and in Japan, the Nikkei soared to its highest close in six years at 15,727.96 (up +66.60% over the past year, its largest yearly gain since 1972).

 

As we witness this outbreak of optimism, the FX markets are taking some interesting twists and turns. In the UK, the pound rose to its highest level versus the US dollar since August 2011, at $1.6384, as the UK economy is seen as potentially growing faster than the US. On the other side of the coin, the Japanese yen fell to its lowest point versus the US dollar since late May at 102.61/USD.

 

US oil prices continue to trend lower on fundamentals. WTI touched its lowest price since July at $92.24/barrel. Supply seems to be pressuring prices lower, as it was announced that the US is producing over 8 million barrels a day for the first time since 1989 (think “Love Shack” by the B-52’s).

 

There were a couple of interesting actions involving sovereign credit risk this week. S&P upgraded the outlook for Spain from negative to stable and the Netherlands were dropped out of the exclusive “AAA-club” with their credit rating being lowered to “AA+” from “AAA”. There are now only thirteen “AAA’s” recognized by S&P (the US is “AA+”).

 

All eyes will be on the upcoming Employment report to be released Friday December 6^th and the final scheduled FOMC meeting to be held on December 17^th & 18^th.