Market Commentary: Week of August 7, 2023

Last Week

It was another gut-wrenching week in the rates markets that spilled over into the risk markets by week’s end despite some semi-positive signs for the war on inflation. The long end of the Treasury curve was shredded with the 10-year notes breaching key support levels multiple times. All the major world economies spent vast sums of borrowed money to stimulate, protect, and aid their citizens from Covid and the effects of the Ukraine War and now must fund a good amount of these borrowings with funding rates that have tripled. Everything seemed ok when Modern Monetary Theory went from a bad economist’s joke to, “Hmm, maybe there’s something to this MMT?” All was well as long as the world’s central banks printed trillions of currency out of thin air while keeping borrowing rates extraordinarily low with extraordinary monetary policies (zero or negative policy rates and quantitative easing). The two biggest borrowers, the USA and Japan, had the magic bullets. The US had the US Dollar, the world’s reserve currency while in Japan, 95% of the JGB market is owned domestically (so they are borrowing almost exclusively in their own currency). Now however with the G7 central bank’s taking their thumbs off the scale, the BOJ being the latest, the new question is, “Who’s gonna buy ALL THESE BONDS?”. We’ll start finding out very soon as the Treasury Department announced at the end of the week that they will be auctioning off $103 Billion 3-year, 10-year and 30-year notes and bonds this coming week. That is up from last month’s auction of $90 billion, a nice 14% increase.

• The S&P 500 dropped 2.27% for the week. The average daily move was 0.52%.
• The NASDQ fell 2.85% for the week. The average daily move for the week was 0.65%.
• The 2-year Treasury yield declined 11 basis points, closing at 4.77% on Friday. High year-over-year 5.07%, low yield 3.19%.
• The 10-year Treasury yield rose 7 for the week, closing at 3.85% on Friday. Year-over-year high yield 4.24%, low yield 2.58%.
• The VIX Index surged 22% for the week, closing at 17.1 on Friday. Year-over-year high 34.45 and low 12.91.
• The MOVE Index increased 5.6% for the week, closing at 115.91 on Friday. Year-over-year high 198.71 and low 97.33.
• 5-year Investment Grade Corporates (as measured by Markit CDX) spreads widened 5 basis points, closing at 68 basis points on Friday. High spread Year-over-year high 111 and low of 64.
• 5-year High Yield corporate debt (as measured by Markit CDX) spreads widened 28 basis points, closing at 436 basis points on Friday. Year-over-year high 627, and low 408.
• US Dollar Index increased 0.39% closing at 102.02 on Friday. Year-over-year high 114.11 and low 99.77.
• WTI Crude increased 2.78% for the week, using the September WTI Futures contract, closing at 82.82 on Friday. Year-over-year high 104.22, and low 66.74.  
• Gold, as measured by the December futures contract, declined 1.2% for the week, closing at 1,976 on Friday. High price for the front contract year-over-year 2,056 and low 1,624.
• Bitcoin dropped 1.38% for the week closing at 28,938 on Friday. High price year-over-year 31,386 and low 15,632.

The Week Ahead  

We come in this morning with equities up small while Treasury yields continue heading up substantially. Currently, the 10-year note is once again breaching an important resistance (yield) level of 4.08%. As noted above, Treasury is auctioning off $103 billion 3-year, 10-year and 30-year notes and bonds, starting Tuesday. I guess we can say a decent yield concession has been given with last week’s rout so there’s hope. As a betting man, I am going to say that initially the auctions will be weak, but by week’s end, the lucky buyers will be in the green. On Thursday we get July CPI. Street economists are calling for continued cooling so stay tuned!

Definitions:

An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg. The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield. • The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. • The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.• The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with a range of 23 to 37 days to expiration.• The ICE BofA MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.• The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Tele-communications. Markit CDX indices roll every 6 months in March & September. • The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September. • The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.

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