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Market Commentary: Week of April 6, 2020


market-commentary-week-of-april-6-bodyWhat happened?

Another wild and exhausting week in the financial markets. From the old adage, “seeing is believing,” COVID-19 has begun to ravage New York and the New York City Metro Area (New Jersey and southern Connecticut) and key markets such as Agency MBS and Municipals began to feel shaky again. For Agency MBS the Fed reduced their purchases per day from $50 billion (which was no way sustainable) to around $20 - $25 billion per day and the market promptly threw up as Agency MBS spreads widened 43 basis points to Treasuries. Municipal bonds also wobbled with high-grade issues widening about 35 basis points to Treasuries. The prior week was dominated by Fed/Treasury love and investment manager outlooks that “trades of a lifetime” abounded in risk assets. This week was soberer; nothing was more sobering than the Thursday Jobless Claims report that showed 6.6 million Americans filed for insurance -that is 10 million in two weeks. Then the BLS Employment Report showed a March job reduction of 701,000 and the stunning reality set in that there most probably will not be a V-shaped economic rebound. The only thing that “saved” stocks was President Trump’s tweet that the Russians and the Saudis were going to cut crude production by 10-15 million barrels a day. As is often the case with the tweets, the Russians and the Saudis didn’t seem to know what the President was talking about. However, the free-fall in crude stopped. We’ll see what happens this week when the U.S., Russia and Saudi Arabia speak.

  • The S&P 500 was down 2.6% for the week. The average daily move for the week was 2.6%

  • The NASDAQ was down 2.4% for the week. The average daily move for the week was 2.4%.

  • The 2-year Treasury dropped 1 basis point, closing at .231% Friday, the lowest yield since 2013.

  • The 10-year Treasury dropped 8 basis points, closing at .60% Friday, the lowest closing since the record low-yield of .54% three weeks ago.

  • The VIX Index decreased sharply by 29% closing at 46.80 on Friday.

  • The MOVE Index decreased 26%, closing at 65.01 Friday as the Fed’s QE has tamped down volatility.

  • 5-year Investment-Grade Corporates (as measured by Markit CDX) widened 16 basis points, closing at 128 basis points Friday. High-Yield corporate debt (as measured by Markit CDX) widened 151 basis points, closing at 774 basis points.

  • US Dollar Index increased 2.3%, closing at 100.58 on Friday.

  • WTI Crude was up 32%, closing at 28.34 on Friday.

What’s going to happen?

The news from our battle with COVID-19 will continue to dominate as the crisis deepens. Small to mid-size businesses continue to suffer as evidenced by sky-rocketing jobless claims. The Main Street Lending program kicked off Friday. After initial confusion, it appeared the program started to shift out of the park. There’s still a lot of kinks businesses, lenders and the Small Business Administration need to work out, but we expect to see it ramp up quickly. The question is, is $350 billion enough and will it get to those who need it in time? Additionally, well-meaning programs like mortgage payment forbearance mean huge problems for the mortgage lending and servicing universe. Between forbearance and delinquencies ramping up to 2009 levels and beyond, non-bank originators will struggle to come up with cash to forward principal interest payments to the GSEs. Additionally, GSEs are making frequent margin calls on mortgage originators and forward delivery risk heightens. Our financial system was just not built for the entire economy shutting down at once. This issue, along with the potential that Freddie and Fannie may need another bailout, will make itself known pretty soon. It’s going to be another tough week.

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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