Market Commentary: Week of September 26, 2022

Last Week

It was another punishing week as nearly all financial asset values were clobbered. The highlight of the week was the Fed’s FOMC meeting, which concluded on Wednesday. The statement and Chairman Powell’s press conference repeated the theme Powell laid on the markets last month at Jackson Hole, “keep at it until the job is done.” The Fed reiterated that current levels of inflation are simply unacceptable, extinguishing it is currently the Fed’s only responsibility, and economic pain is necessary.

The FOMC Dot Plot showed median expectations of the funds’ rate in 2023, about 50 basis points higher than the market had priced in. This caused rates to skyrocket, stocks to crash, credit spreads to blow out, and commodities to get plastered for another week as the US Dollar reigned supreme.

Then, there was the United Kingdom. In what was perhaps the most ridiculous unforced era in the history of finance, the new conservative government in London decided the best way to deal with skyrocketing inflation, a currency under serious pressure, and painfully high-interest rates was to announce huge supply-side tax cuts and massive deficit spending.

This has set off a major currency crisis as Pound Sterling has crashed to the lowest levels versus the USD since 1985. Additionally, Gilt yields soared, adding fuel to the global bond selloff. Well done.  

• The S&P 500 dropped 4.6% for the week. The average daily move was 1.22%.  
• The NASDAQ plunged 5.1% for the week. The average daily move for the week was 1.33%.  
• The 2-year Treasury yield sprang up 34 basis points closing at 4.2% on Friday, a new year-over-year high. High year-over-year 4.2%, low yield .20%.
• The 10-year Treasury yield rose 24 basis points for the week, closing at 3.69% on Friday. Thursday, the 10-year posted a new year-over-year high of 3.72%. Year-over-year high yield 3.72%, low yield 1.24%.
• The VIX Index jumped 14% for the week, closing at 29.92 Friday. Year-over-year high 36.45 and low 15.01.
• The MOVE Index rose 9.9% for the week, closing at 137.28 on Friday. Year-over-year high 156.16 and low 51.73.
• 5-year Investment Grade Corporates (as measured by Markit CDX) spreads widened 17 basis points for the week closing at 106 basis points Friday, a new year-over-year high. High spread Year-over-year high 106 and low of 46.  
• High Yield corporate debt (as measured by Markit CDX) widened by 40 basis points, closing at 568 basis points on Friday. Year-over-year high 588, and low 273. 
• US Dollar Index surged 3.9% for the week closing at 113.19 on Friday, the highest reading in nearly 21 years. Year-over-year high 113.19 and low 92.54.    
• WTI Crude fell 7% using the November WTI Futures contract, closing at 78.74 Friday. Year-over-year high 123.70, and low 65.57.   
• Gold, as measured by the December 2022 futures contract, dropped 1.7% for the week closing at 1,656 on Friday, a new year-over-year low. High price for the front contract year-over-year 2,043 and a low of 1,656.
• Bitcoin fell 4.6%, closing at 18,852 on Friday. High price year-over-year 67,734 and low 17,785. 

The Week Ahead

We come in this morning where we left off last week, with nowhere to hide. If that sentence looks familiar, it is. Everything is awful again, with the Pound Sterling crisis front and center.

Undeterred by a crashing currency making inflation worse and significantly higher interest rates, Finance Minister Kwasi Kwarteng said over the weekend that not only was he not considering backing off his idiotic policy that he announced Friday, but he also promised even more significant tax cuts. The Pound promptly plumbed new lows as parity with the USD look likely. 

There are rumors that the Bank of England will announce either an emergency rate hike or some sort of currency intervention. That has stabilized the currency somewhat. However, many doubt that the BOE can do anything to support the Pound without making things worse. The last time the Pound was destroyed, George Soros launched an attack from the outside. This time the “attack” comes from HRM’s own government.

It is a heavy data week, with durable goods and housing data coming Tuesday and Wednesday, and the all-important PCE data Friday.

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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