Market Commentary: Week of October 3, 2022

Last Week

It was a tough week. The biggest event was the reaction to the unforced error by U.K. Prime Minister Liz Truss’ ridiculous tax cut, deficit spending plan to heal the U.K.’s crumbling currency, and skyrocketing inflation.

By Tuesday, the 30-year Gilt yield had risen 121 basis points from the announcement of the government’s plan and a full-blown crisis in the country’s pension funds was afoot. Apparently, the Gilt market was a couple of hours away from collapse due to massive margin calls from dealers and managers on the other side of the pension fund’s Liability Driven Investments when the Bank of England stepped in and promised to buy unlimited amounts of Gilts when they saw fit. This stabilized the markets somewhat; however, it appears to be a short-term fix that expires on October 14. This crisis blasted risk markets and non-risk markets alike in yet another “nowhere to hide” week.

Also developing rather quickly is the growing problem with Leverage Buyout (LBO) funding. After the disastrous Citrix deal the prior week, banks are now stuck with Apollo’s Lumen Brightspeed deal as nobody wants to touch the bonds or the loans.

The S&P/LTSA Leverage Loan Index is down approximately 2.5% for September, which is impressive considering that, just a few months ago, there was a food fight for every syndicated loan as the product’s lack of interest rate duration was touted. Unfortunately, the product has plenty of spread duration. This will get ugly and will test Fed's resolve to stay the course with rate hikes.

• The S&P 500 dropped 2.9% for the week. The average daily move was 1.37%.
• The NASDAQ plunged 2.7% for the week. The average daily move for the week was 1.45%.
• The 2-year Treasury yield sprang up 8 basis points closing at 4.28% on Friday. On Monday the note printed 4.35% a new year-over-year high. High year-over-year 4.35%, low yield .20%.
• The 10-year Treasury yield rose 14 basis points for the week, closing at 3.83% on Friday. Tuesday the 10-year posted a new year-over-year high of 3.95%. Year-over-year high yield 3.95%, low yield 1.24%.
• The VIX Index jumped 5.7% for the week, closing at 31.62 Friday. Year-over-year high 36.45 and low 15.01.
• The MOVE Index rose 3.4% for the week, closing at 141.89 on Friday. On Wednesday the index posted a new year-over-year high of 158.9. Year-over-year high 158.99 and low 51.73.
• 5-year Investment Grade Corporates (as measured by Markit CDX) spreads widened 2 basis points for the week closing at 108 basis points Friday. On Tuesday the index posted a new year-over-year high of 111 basis points. High spread Year-over-year high 111 and low of 49. 
• High Yield corporate debt (as measured by Markit CDX) widened by 42 basis points, closing at 610 basis points on Friday. On Tuesday the index set a new year-over-year high of 627 basis points. Year-over-year high 527, and low 288.
• US Dollar Index fell 0.8% for the week closing at 112.12 on Friday. On Tuesday the index posted its highest reading in nearly 21 years closing at 114.11. Year-over-year high 114.11 and low 93.34.   
• WTI Crude rose 1% using the November WTI Futures contract, closing at 79.49 Friday. Year-over-year high 123.70, and low 65.57.   
• Gold, as measured by the December 2022 futures contract, rose 1% for the week closing at 1,672 on Friday. On Monday the gold contract set a new year-over-year low of 1,633. High price for the front contract year-over-year 2,043 and low 1,633.
• Bitcoin rose 3%, closing at 19,425 on Friday. High price year-over-year 67,734 and low 17,785.

The Week Ahead

We come in this morning full of excitement! Over the weekend, U.K. PM Truss blamed her Chancellor of the Exchequer Kwasi Kwarteng for the failed rollout of her growth plan (meaning the plan is fine, it was just the presentation could have been better), stood behind the plan, and then scrapped the high-income earner tax cut this morning! Interest rates around the world are getting a relief rally this morning.

Speaking of relief, what seems to be the 50^th CEO of Credit Suisse issued an email to employees over the weekend telling them not to worry because the bank’s liquidity and capital positions are fine. Perhaps somebody should tell Herr Koerner that since 2008, when a bank leads with liquidity and capital to calm employees and markets, the complete opposite reading happens. Credit Suisse stock is getting killed (again) while CDS spreads are blowing out past 2009 levels.

We get employment numbers Friday. Good times!

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.

---

Investing involves certain risks, including possible loss of principal. You should understand and carefully consider a strategy’s objectives, risks, fees, expenses and other information before investing. The views expressed in this commentary are subject to change and are not intended to be a recommendation or investment advice. Such views do not take into account the individual financial circumstances or objectives of any investor that receives them. All indices are unmanaged and are not available for direct investment. Indices do not incur costs including the payment of transaction costs, fees and other expenses. This information should not be considered a solicitation or an offer to provide any service in any jurisdiction where it would be unlawful to do so under the laws of that jurisdiction. Past performance is no guarantee of future results.

Securities offered through SWBC Investment Services, LLC, a registered broker/dealer. Member FINRA & SIPC. Advisory services offered through SWBC Investment Company, a Registered Investment Advisor, registered as such with the US Securities & Exchange Commission. SWBC Investment Services, LLC is under separate ownership from any other named entity. SWBC Investment Services, LLC a division of SWBC, is a nationwide partnership of advisor.