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Market Commentary: Week of June 1, 2020


market commentary week of june 1 2020_bodyWhat happened:

It was an action-packed week with regard to outside market events. After the Chinese Legislature passed laws that essentially put Hong Kong under the same national security laws as Mainland China, President Trump reacted by removing Hong Kong’s special trade status. Additionally, the President announced that the United States will no longer fund the World Health Organization under the accusation that it is overly influenced by China and it aided and abetted China in covering up COVID-19. Naturally, this is a negative for US-China trade relations.

Additionally, later in the week, the President momentarily rattled the social media sector by signing an executive order to remove social media platforms Rule 230, which gives them cover if people or organizations say bad things. This occurred after Twitter fact-checked one of the President’s tweets. Last week also marked an ugly milestone for COVID-19, as we passed the 100,000-fatality mark. However, stocks and corporate bonds ignored such negative events and rallied hard. A clear sign of bullish sentiment was Thursday’s Initial Jobless Claim release that another 2.1 million Americans filed for unemployment insurance, which was treated as a positive because it was lower than the previous week’s 2.5 million. (That is about 40 million over the last 10 weeks).

  • The S&P 500 rose 3% on the week. The average daily move for the week was .8%; the index is now up 36% from the March 23rd

  • The NASDAQ increased 1.8% for the week. The average daily move for the week was .7%. The index is now up 38% from the March 23rd

  • The 2-year Treasury was nearly flat for the week, closing at .163% on Friday.

  • The 10-year Treasury was nearly flat for the week, closing at .65% on Friday.

  • The VIX Index decreased 2% closing at 27.51 on Friday.

  • The MOVE Index was flat for the week, closing at 51.55 on Friday.

  • 5-year Investment-Grade Corporates (as measured by Markit CDX) tightened 10 basis points for the week closing at 77 basis points Friday (from March 1st; high 151, low 66). High-yield corporate debt (as measured by Markit CDX) tightened 85 basis points, closing at 639 basis points (from March 1st; high 871, low 364).

  • US Dollar Index was down 1.5%, closing at 98.22 on Friday. This was the lowest close since March 16th.

  • WTI Crude was up 7% using the July WTI Futures contract, closing at 35.49.

What’s going to happen:

Added to the COVID-19 crisis, we now have a nationwide crisis following the murder of George Floyd in Minneapolis last week. Protests have rocked cities nationwide, which besides being a crisis in its own right, also feeds into the COVID-19 crisis with person-to-person contact spreading. Up until now, risk assets have been impervious to what we considered catastrophic news. Corporate-debt issuance topped $1 trillion for the year last month and has been easily absorbed. Equity indices have rocketed back as well. Investors are putting all their faith into the credo that “The Fed Has My Back,” and maybe they are right. The line between saving the economy and its citizens and saving the value of financial asset prices have been blurred by the Fed. Last Friday, Bloomberg published an article “The Really Big Stock Bull Case Says Fed Stimulus Doesn’t Go Away.” This quote is from the article:

“Make no mistake: as big a role as reopening has played in the rebound, Federal Reserve largess, alongside trillions of dollars in payouts from Washington, has been as crucial element lifting stocks. While the path of the virus is unknown (Will there be a second wave? Can a vaccine succeed?), one thing that seems certain is perpetual Fed support.

Wow.

Biggest data this week will be Friday’s BLS employment report. Most economists are calling for an unemployment rate of 20%, which while staggering, will be no big surprise. Nothing seems to bother stocks. The Treasury yield-curve spent most of May steepening due to the comeback of crude and optimism over reopening. As bonds usually represent a more realistic appraisal of what is actually going on, we may see some reversal of this steepening this 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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market commentary week of june 1 2020_listing

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