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Market Commentary: Week of March 9, 2020


weekly_market_commentary_march_9_bodyWhat Happened:

The appropriate answer to “What happened last week?” could be, “What DIDN’T happen last week?” While not as scary as the week Lehman died, last week was right up there. As COVID-19 continued to spread both in the US and the rest of the world disrupting just about everything that drives the global economy, the Federal Reserve came with a 50 basis point inter-meeting cut to their policy rate on Tuesday.

All this move seemed to do was cause more uncertainty and market expectations for even more cuts at the regular March 18th meeting. The stampede into Treasury notes and bonds created new all-time lows to both the 10-year Treasury note and 30-year Treasury bond. We watched with shock and awe as the 10-year sliced through 1% on Wednesday and continued all the way down to 66 basis points on Friday morning. The mortgage universe was forced to buy massive amounts of duration as nobody’s model accounted for a sub 1% 10-year. Meanwhile, rumors of large macro hedge-funds being caught short the Ultra Bond (30-year) contracts drove the bond down to a yield of 1.25% on Friday. As with the 10-year, the 30-year bond set an all-time low yield on Friday. Equities gyrated wildly, and almost comically, ended up near flat for the week. Credit-sensitive bond spreads widened to year-over-year highs -after setting all-time lows just three weeks ago. Everyone went home Friday afternoon feeling that after a brief weekend respite, the carnage and volatility would continue first thing Sunday night as Asia opens.

  • The S&P 500 was up .6% for the week. However, the average daily move for the week was 3.3%

  • The NASDAQ was up 1% for the week. However, the average daily move for the week was also 3.3%.

  • The 2-year Treasury dropped 40 basis points, closing at .51%. This is the lowest yield since early 2015

  • The 10-year Treasury dropped 32 basis points, closing at an all-time low in yield of .76%

  • The VIX Index increased 4.5%, closing at 41.94. That is the highest closing year over year. On Friday, the VIX hit 54 intra-day. The VIX has rarely breached 50 since the depths of the Financial Crisis.

  • The MOVE Index increased by 15%, closing at 125.21, the highest level since 2009

  • 5-year Investment Grade Corporates (as measured by Markit CDX) widened 17 basis points, closing at 83 basis points, a year-over-year high. 5-year High Yield corporate debt (as measured by Markit CDX) widened 73 basis points, closing at 442, a year-over-year high

  • US Dollar Index declined 2.2%, closing at 95.95 (High YOY 99.865, Low YOY 95.76)

  • WTI Crude was down 7.8%, closing at 41.25, the lowest closing year-over-year.

What’s Going To Happen:

If things weren’t chaotic enough, late last week Russia decided that it would no longer be the “+” in OPEC+. The Saudis asked for large production cuts to prop up prices that have already been ravaged by steep declines in demand.The Russians responded, probably accurately, that every time they have gone along with a supply cut, the US shale producers just keep on pumping and taking more market share. To this, the Saudis have now stated that they are going essentially flood the market with oil by ramping up production and heavily discounting sales to Asia. Oil producers racing to the bottom won’t be good for stocks or big sectors of corporate credit. Meanwhile, COVID-19 news continues to get scarier.Northern Italy was put under quarantine starting this weekend by the Italian government. In the US more and more cases are popping up, while confusion reigns as to what exactly the US government’s plan is. As of this weekend, there’s been only about 6,000 tests for the virus as test kits have not made their way into the right hands or haven’t been produced at all. Major events are being canceled while airlines are dramatically cutting flights. Unfortunately, we think the markets are in for more of the same this week.  Nearly all economic data coming out this week is for February. Nobody cares about the rearview mirror right now so, all data will be treated as a non-event.

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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