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Market Commentary: Week of May 11, 2020


Market-commentary-week-of-May-11-2020_body-1What happened:

From the “Never thought I was going to see that!” department, the January 2021 Fed Funds Futures contract crossed the Rubicon and closed over 100, which means an expectation of a negative Fed policy rate.  What makes this even more “interesting” is that this occurred BEFORE Friday’s Employment report which, while expected to bad, felt even worse when the numbers posted. The April report showed over 21 million jobs lost, a 14.7% unemployment rate, and a 22.8% underemployment rate. The May report is expected, even by The White House, to be worse. The positive aspect in the report was much of the job loss is viewed as temporary. Not much of a silver lining, because a very large percentage of workers that are unemployed (even if it is “temporary”) don’t have the savings to ride it out. The two-year Treasury note also made a new low last week, 0.14%. Meanwhile in stocks, the S&P closed UP 3.4% and the NASDAQ blasted up 6%. We know that both indices have over-sized weighting of Apple, Microsoft, Amazon, Facebook, and Google, but still! Crude also rallied hard with the June WTI contract up 25%, off hopes that oil consumption will increase as economies start reopening. As far as we know, that change in consumption is not going to really affect the ocean of unwanted crude looking for storage this week or next. Unless the May WTI collapse to NEGATIVE $37.63 was a fluke, and somehow storage at Cushing magically increased a lot, the June contract should be interesting as we get close to its May 19th expiry.

  • The S&P 500 increased 3.4% for the week. The average daily move for the week was 0.9%

  • The NASDAQ increased 6% for the week. The average daily move for the week was 1.2%.

  • The 2-year Treasury decreased 3 basis points, closing at .16% on Friday. On Thursday, the note closed at 14 basis points, the all-time low.

  • The 10-year Treasury increased 7 basis point, closing at .68% on Friday.

  • The VIX Index decreased by 25%, closing at 27.98 on Friday. This is the first close below 30 since February 26th.

  • The MOVE Index increased 19%, closing at 57.4 on Friday. The index had been dropping steadily for weeks since hitting a high of 163.7 on March 9th.

  • 5-year Investment-Grade Corporates (as measured by Markit CDX) was unchanged for the week, closing at 90 basis points Friday (from March 1st, high 151; low 66). High-yield corporate debt (as measured by Markit CDX) tightened 18 basis points, closing at 633 basis points (from March 1st, high 871; low 364).

  • US Dollar Index was up 0.7%, closing at 99.73 on Friday.

  • WTI Crude was up 25%, using the June WTI Futures contract, closing at 24.74.

What is going to happen?

Last week saw an utter divergence in risk opinions between safe assets and less-safe assets. We have seen the movie before in 2007, and safe assets ended up winning the argument. This is a different crisis, where the Fed and Treasury acted much sooner and much more aggressively to keep the financial plumbing from seizing up—that is good. In addition, this crisis is not about bad bank balance sheets, not yet, anyway. That is also good. We feel, as most do, that it all depends on an investor’s point of view on how a reopening of the economy happens, and how COVID-19 changes business and consumer behavior in the near present and the future. Last week, there was a lot of positive feeling among risk assets, like stocks, that while reopening of the economy will be measured, it will be gradually getting better, with no serious disruptions like a second wave of infections and/or a serious long-term change in consumer behavior. If you feel that way, then that, plus the entire monetary and fiscal stimulus provided by the Fed and Treasury, tells you to keep buying. If you feel the opposite, as in, “this is far from end or even the beginning of the end,” then the fear shown by an implied negative January Fed Funds future contract, or a 14 basis-point 2-year Treasury note yield is justified. This week we have inflation data and retail sales for April. We think we can safely assume that they will be deflationary and awful. The only number that really matters is Jobless Claims on Tuesday. Economists expect about 2 million new filers.

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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