Markets Finish the Week Mostly Unfazed Despite Continued High Terror Alert and Immigration/Refugee NIMBY Battles

A week after the Paris attacks, and despite the battles in Congress and across the 50 individual states regarding closing borders/refusing refugees, most of the financial markets have held up fairly well.  We did not see much of the risk-off/flight to quality retreat one might have expected.  Since last Friday, U.S. stock indices are up 3%+, while the dollar is mostly flat against other major currencies, commodity prices including gold are mostly unchanged, while the U.S. rate environment is generally close to last Friday’s levels, albeit the curve has flattened with short rates up a few basis points and long rates down a few basis points.  In addition to the persistent negative bond yields in Europe, one other area that continues to stand out and indicate some possible larger market dislocation is U.S. swap spreads. As noted in past commentary, swap spreads have been collapsing of late, and as of this morning swaps from 3 year maturities and longer all trade below comparable U.S. Treasury yields.  This clearly creates opportunities for payers of fixed, but does throw into question where the long term relationship between swap rates and “risk free” government securities should settle when things return to “normal”.

Today Treasuries are slightly firmer with rates across the curve down 1-2 basis points.  On the commodity front, spot coffee prices are up again this morning and are up 10% off the lows over the last 2 days, while WTI Crude is still struggling at the $40 per barrel level.  Global stock and bond markets were mostly mixed overnight, and the dollar is a fraction stronger against most major currencies today.

As we start to hit the holiday season, we would expect the markets to become increasingly choppy, as any new domestic economic data, significant international events, or Fed activity will need to be absorbed into a market with probably a lot less liquidity than in non-holiday trading sessions.  That said, we see a lot of economic news to watch closely next week, including the November Manufacturing PMI and Existing Home Sales releases on Monday, Q3 GDP, Personal Consumption and Consumer Confidence data next Tuesday, and Durable Goods Orders and New Home Sales on Wednesday.

Have a safe and enjoyable weekend!