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Market Commentary: Week of May 25, 2020


market commentary week of may 25 2020_bodyWhat happened:

The week started with euphoria that the drug-maker Moderna was making great progress on a COVID-19 vaccine. Stocks, oil, and corporate debt risk surged. Even though the next day brought a bit more sober news about Moderna’s progress, risk assets finished the week strong. Speaking of sober, another 2.4 million applied for initial jobless claims; continuing claims are now at 25 million. Additionally, many losing their jobs are also losing their health insurance, which is bad, especially in the midst of a pandemic. Secretary of Treasury Mnuchin and Federal Reserve Chairman Jerome Powell testified in front of Congress during the week, and while they disagree on the shape of recovery, they both agreed that when it comes to federal aid we are going to need a bigger boat. Moreover, the April 29th FOMC meeting minutes came out, and as expected, the mood was dismal. What was most interesting was comments within the minutes that some members favored “capping” short-term and medium-term Treasury rates, giving the nod that Treasury is going to have to issue an astronomical amount of Treasury bills, notes, and bonds and the Fed will take care of the “supply problem.” Welcome to Modern Monetary Theory. Despite all the negativity, stocks and oil rallied hard with nations around the world gradually opening their economies.

  • The S&P 500 increased 3.2% for the week. The average daily move for the week was 1.51%.

  • The NASDAQ increased 3.4% for the week. The average daily move for the week was 1.26%.

  • The 2-year Treasury increased 2.3 basis points, closing at .17% on Friday.

  • The 10-year Treasury increased 1.6 basis points, closing at .66% on Friday.

  • The VIX Index decreased 12%, closing at 28.16 Friday.

  • The MOVE Index decreased 0.8%, closing at 51.67 Friday.

  • 5-year Investment-Grade Corporates (as measured by Markit CDX) tightened 9 basis points for the week, closing at 87 basis points on Friday (from March 1st; high 151, low 66). High-Yield corporate debt (as measured by Markit CDX) tightened 61 basis points, closing at 624 basis points (from March 1st; high 871, low 364).

  • US Dollar Index was down 0.7%, closing at 99.86 on Friday.

  • WTI Crude was up 13% using the July WTI Futures contract, closing at 33.25.

What’s going to happen?

We get the feeling that we are getting the time-honored “Buy the rumor and sell the news,” with regard to risk assets and economy reopening. High-profile companies continue to go bankrupt, mostly retailers now, and Hertz. More are expected, with some expecting a tidal wave. Treasury bills, notes, and bonds continue to bet on a non-V shaped recovery, more like a long slog. Despite what stocks and corporate debt are doing, it is hard to find any economist that does not think that we peak at some ungodly unemployment rate (estimates range from 20% - 35%) in the next month or so, and slowly come down from that peak. Moreover, many believe we may stay at an 8% - 10% unemployment rate for the near future. Additionally, many economists are changing their assumptions that a vast majority of layoffs are temporary. Businesses, especially small- to medium-size businesses, will either not come back or come back in a reduced state, most notably eateries, leisure, and hospitality businesses, which employ many people. The actual opening of many state economies gives a firsthand look at how slowly these industries are coming back and how COVID-19 is changing the businesses. Many restaurants won’t be able to survive long enough to see the eventual vaccine on 25% to 50% occupancy. Therefore, many layoffs are now being seen as long-term. At some point—relatively soon— we think reality hits rosy recovery expectations and risk assets will get a rinsing. However, to date, betting against the market has been a slaughter, so who really knows. We have an entire generation of traders who have done quite well ignoring gloom-and-doom over the last decade by “buying the dip.”

 

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 may 25 2020_listing

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