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Market Commentary: Week of April 27, 2020


market-commentary-week-of-april-27-bodyWhat Happened

It was another wild week in the financial markets—with oil taking the crazy prize. We are not sure if anyone had seriously thought before April 2020 that a hard commodity like oil could ever trade negative. On Monday it did, as anyone holding a May WTI contract that did not have the ability to take delivery of 1,000 barrels of WTI crude (the size of one contract) began paying those who had somewhere to take delivery as much as $40 a contract. It was insanity, plain and simple. Retail investors owning ETFs or ETNs linked to crude futures were decimated; we are not sure that has ever happened before. Cushing, Oklahoma, the delivery point for WTI Crude that trades on the CME, had no room at the inn. The price action on Monday and Tuesday had the stink of "those in-the-know" knew that a whole lot of non-professionals did not know; that there was nowhere to store oil. Cushing supposedly has capacity for 76 million barrels of crude. It is reported that 60 million is filled, while the remaining 16 million of capacity is either off-line or already “spoken for.” We would love to see who actually got paid $40 a futures contract Monday to take delivery.

  • The S&P 500 was down 1.3% for the week. The average daily move for the week was 1.7%.

  • The NASDAQ was down 0.2% for the week. The average daily move for the week was 1.8%.

  • The 2-year Treasury increased 2 basis points, closing at .226% on Friday.

  • The 10-year Treasury decreased 4 basis points, closing at .60% on Friday.

  • The VIX Index decreased by 6%, closing at 35.93 Friday.

  • The MOVE Index decreased 5%, closing at 66.09 Friday.

  • 5-year Investment-Grade Corporates (as measured by Markit CDX) widened 7 basis points, closing at 94.14 basis points on Friday (from March 1, high 151, low 66). High-Yield corporate debt (as measured by Markit CDX) widened 86 basis points, closing at 674 basis points (from March 1, high 871, low 364).

  • S. Dollar Index was up 1%, closing at 100.38 on Friday.

  • WTI Crude was down 32% using the June WTI Futures contract, closing at 16.94. During the week, the contract traded as low as 6.50, while the May contract closed at MINUS 37.63.

What’s going to happen?  

It is going to be another tough week on the economic front, and we think we will see more instability in oil. The only “positive” for the WTI futures is there won’t be as much selling pressure on the June contract as the major exchange traded products linked to WTI crude have either folded up shop (OIL) or dramatically changed their makeup (USO) to avoid wiping out investors and actually having to have the ETF’s sponsor pony-up their own money. This week the CARES Act Payment Protection Program will have its second performance. Hopefully, it will go toward independent small- to medium-size businesses as opposed to hotel and restaurant chains. Stocks continue to baffle many, and all we can say is, the stock market is not the economy—that is what some smart person said once, anyway. There will be limited re-openings in certain states starting this week. What was interesting this past week and weekend was listening to governors, mayors, county executives, and business owners admitting the “2019-Normal” will not be returning for a very long time. Talking about reopening is great (or bad, given your point of view) but when the rubber hits the road, there’s a lot of concession to the idea that the recession will be very deep and the recovery very slow, until science can create the drugs that alleviate COVID-19 symptoms, and an eventual vaccine. The good news with the latter is Bill Gates is devoting the Gates Foundation’s entire effort to finding and producing a vaccine in 12 months. Bill tends to get things done, so there’s hope.

 

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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