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Week InReview

Friday | Sep 13, 2024

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S&P 500 stages a $1.3 trillion rally.

Optimism abounds | A rally that added over $1.3 trillion to the S&P 500 this week powered ahead as the latest economic data did little to alter bets on a series of Federal Reserve rate cuts. Every major group in the US equity gauge rose Thursday, while Treasuries saw small moves. Swap contracts priced in slightly higher odds of a half-point Fed reduction next week after a Wall Street Journal report said policymakers were considering cutting by 25 or 50 basis points. German bunds snapped a seven-day winning streak after the European Central Bank’s Christine Lagarde said rates would be sufficiently restrictive after an expected quarter-point interest rate cut.


Rising costs | Blue-chip companies are spending more on US dollar bond interest payments, and even Fed rate cuts this year won’t immediately reverse the trend. High-grade issuers are poised to pay some $420 billion in coupons this year, up 18% from last year, according to JPMorgan. That increase is three times the revenue growth rate for companies in the S&P 500 during the second quarter — suggesting the trend is weighing on profit growth. The difference between yields on new bonds and maturing bonds so far this year for companies in the US investment-grade market averages about 2.01 percentage points, data compiled by Bloomberg show.


Up & coming | Sri Lanka reports GDP on Friday and will likely show growth slowing to 4.7% year on year in the second quarter of 2024 from 5.3% in the previous quarter, mainly due to a high year-earlier base. Japan is scheduled to publish industrial production data.

let's recap...

How Wall Street scored a win from the Fed on new bank regs

America's biggest banks will face stricter rules eventually, but more relaxed than regulators wanted. After the biggest lobbying campaign in recent memory, legal threats, and surprising political allies, the industry defeated the initial slate of regulations known as Basel III Endgame. The first proposal landed when the collapse of Silicon Valley Bank and other regionals was still fresh. Officials at the Fed, OCC, and FDIC said the crisis proved that the industry needed stricter regulations. But even the Fed's Michael Barr, the face of the new regulations, admits that moment has passed — and rules made against that backdrop now look too "conservative." (Axios | Sep 11)


US election just one risk among many for nervous stock market

Growing risks to the US stock rally are spurring demand for portfolio hedging; options markets showed, as investors grapple with US economic uncertainty, shifting Federal Reserve policy, and a looming presidential election. The VIX typically rises around 25% between July and November in election years as investors sharpen their focus on the market implications of candidates' policy proposals, BofA data showed. This year, however, political concerns have coalesced with more pressing catalysts for volatility, such as worries over a potentially softening US economy and uncertainty over how deeply the Fed will need to cut interest rates, investors said. (Reuters | Sep 10)


Fed to cut biggest banks' capital hike by half in overhaul

US regulators will make extensive changes to their bank-capital rules proposal, cutting the expected impact to the largest banks by half and exempting smaller lenders from large portions of the measure, a top Federal Reserve official said. The proposed revisions previewed Tuesday by Fed Vice Chair for Supervision Michael Barr would roughly slice the 19% capital hike regulators had planned for the eight biggest US banks in half. Those lenders, including Citigroup Inc., Bank of America Corp., and JPMorgan Chase & Co., would now face a 9% increase in the capital they must hold as a cushion against financial shocks. (Bloomberg Industries - Finance | Sep 10)


Gensler preaches benefits of disclosures

Investors benefit from timely and accurate disclosures, and large institutions should be prepared to make such disclosures in the event of a major change or crisis, according to Securities and Exchange Commission Chair Gary Gensler. “Reliable, comparable, accessible data benefits everyone,” Gensler said on Sept. 10 during a speech before the Peterson Institute for International Economics. “No one private entity, though, has the incentive to create reliable, comparable, and accessible data, even if they might benefit. It’s not in the incentive system. Thus, such data is a public good.” Gensler later said he wanted to give a speech about disclosure when the markets were calm to urge institutions to prepare for more turbulent events. (Pensions & Investments - free link | Sep 10)


AI exuberance masks broad weakness in tech sector, say investors

Many companies unconnected to the artificial intelligence boom are yet to recover from the post-pandemic downturn. (Financial Times - free link | Sep 9)

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