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US Stock Indices Fell: Why Did They Follow Oil Prices?

Why Did Junk Bond Issuance Gain Traction amid Declining Oil?

US stock indices fell

The three US equity indices that we review in this weekly series were down from February 2 to February 9, 2016. Oil prices fell due to the weak global demand outlook. Also, the IEZ (International Energy Agency) released its monthly report on February 2. It warned that oil prices could fall more as Iranian oil enters the market. The S&P 500 Index is tracked by the Vanguard 500 Index Fund Investor Class (VFINX). The S&P 500 Index fell by 2.6%. The Dow Jones Industrial Average (DJIA) fell by 0.9%. Meanwhile, the NASDAQ fell by 5.5%.

IEA warns of a rise in the oil supply

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In its monthly report, the IEA said that “We suggest that the surplus of supply over demand in the early part of 2016 is even greater than we said in last month’s oil market report. If these numbers prove to be accurate, and with the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term. In these conditions, the short-term risk to the downside has increased.”

It also added that the deal between OPEC (Organization of the Petroleum Exporting Countries) and leading non-OPEC producers to cut oil production is nothing but speculation.

What do rising junk bond yields indicate?

With junk bond yields constantly rising, new issuance could fall. Downgrades could increase. This isn’t a good indicator because it signals that the US economy is slowing down.

Jeffrey Gundlach, DoubleLine Capital’s chief investment officer, said that the high-yield debt issuance would probably collapse because yields rose and the economy is slowing down.

Earnings results

Coca-Cola (KO) gained after its earnings were better than analysts’ expectations. Meanwhile, stocks of Goodyear Tire and Rubber (GT) rose despite the company reporting a loss for the fourth quarter.

Sears Holdings (SHLD) fell after the company warned that its fourth-quarter revenue would fall short of analysts’ expectations.

Shares of CVS Health (CVS) were muted after the earnings were in-line with analysts’ expectations. The revenue was better than expected.

Junk bonds

Junk bond yields rose by 29 basis points week-over-week. They ended at 9.5% on February 5, 2016. Due to a rise in the yields, returns of mutual funds investing in junk bonds like the American Funds American High-Income Trust – Class A (AHITX) and the T. Rowe Price High Yield Fund – Advisor Class (PAHIX) fell in the week ending February 5.

This series will cover developments in the primary and secondary markets for high-yield debt and leveraged loans. We’ll start with developments in high-yield primary market issuance.

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