Last Week Last week was a bit of a schizophrenic one for rates and equities as narratives crisscrossed one another. The beginning of the week was dominated by talk of recession and corporate margin co...
On Monday, the Bank of Japan (BOJ) shocked the planet as BOJ Governor Kuroda signaled that Japan would finally end its decades-long policy of “Yield Curve Control” by increasing the cap on the 10-year JGB from 0.25% to 0.5%. The BOJ has now officially joined the rest of the G7 world in its inflation-fighting crusade.
At the end of last year, there was approximately 8.9 trillion dollars’ worth of negative-yielding bonds on the global market. As of this morning, there are now $225 billion. Rates in Europe and North America rose significantly (10-year Treasury yields rose 26 basis points) as JGB 10-year yields nearly doubled.
The BOJ has kept its thumb on the scale for so long that removing it will have many unintended consequences. There is a very good chance that, similarly to the UK’s Liability Driven Investment crisis a few months ago, there are nasty surprises lurking in the $8 trillion JGB market.
Also in Asia, China has suddenly reversed its Zero-Covid policy. This move has caused industrial commodities to spike and contributed to bond yields rising.
Last week, as we headed into Christmas, economic data in the U.S. showed further signs of inflation cooling. However, Friday’s PCE data showed that wages and consumer spending continued to buck the Fed and stand tall.
- The S&P 500 declined 0.21% for the week. The average daily move was 0.91%.
- The NASDAQ dropped 1.93% for the week. The average daily move for the week was 1.09%.
- The 2-year Treasury yield rose 14 basis points, closing at 4.32% on Friday. High year-over-year 4.72%, low yield .40%.
- The 10-year Treasury yield increased 26 basis points for the week, closing at 3.75% on Friday. Year-over-year high yield 4.24%, low yield 1.345%.
- The VIX Index declined 7.7% for the week, closing at 20.87 Friday. Year-over-year high 36.45 and low 16.29.
- The MOVE Index ended nearly unchanged for the week, closing at 113.17 on Friday. Year-over-year high 160.72 and low 72.57.
- 5-year Investment Grade Corporates (as measured by Markit CDX) spreads tightened 2 basis points for the week closing at 81 basis points Friday. High spread year-over-year high of 111 and low of 49.
- High Yield corporate debt (as measured by Markit CDX) declined 13 basis points, closing at 476 basis points on Friday. Year-over-year high 627, and low 288.
- US Dollar Index ended the week nearly unchanged, closing at 104.31 on Friday. Year-over-year high 114.11 and low 94.79.
- WTI Crude advanced 6.84% using the February 2023 WTI Futures contract, closing at 79.85 Friday. Year-over-year high 123.70, and low 71.02.
- Gold, as measured by the February futures contract, rose 0.22% for the week closing at 1,804 on Friday. High price for the front contract year-over-year is 2,043 and the low is 1,645.
- Bitcoin dropped 0.15% closing at 16,811 on Friday. High price year-over-year 67,734 and low 15,632.
The Week Ahead
We come in this morning with stocks up and Treasury yields up about 2.5 basis points across the curve. We have mostly second and third-tier data coming out in this holiday-shortened week. As far as markets are concerned, the end of 2022 can’t get here fast enough!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 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, Technology, Media & Telecommunications. 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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