As we have been saying for several of our previous quarterly economic updates, as inflation goes, so goes the U.S. economy. A quick and rapid descent of inflation will take pressure off the Fed to con...
Market Commentary: Week of November 1, 2021
Written by John Tuohy
November 01, 2021
Last week was one for the ages in rates space. The week started where it left off the prior with inflation breakevens (BE) exploding with the 5-year BE hurtling toward 3%. Then, in the middle of the week, the Bank of Canada announced that it was ending its quantitative easing buying and signaled that they would begin tightening in early 2022. The Canadian 2-year yield went up 24 basis points in a flash. The U.S. 2-year responded in kind increasing nearly 6 basis points as earlier Federal Reserve tightenings began to be priced in to early 2022. Then things got really interesting in the long end of the Treasury curve. The 20-year Treasury started the week about 3 basis points lower in yield than the 30-year. Inexplicably (at the time) the 20-year became unhinged from the rest of the curve plummeting over a point on Thursday and inverting in yield versus the 30-year. Meanwhile, the belly of the yield curve gyrated as inflation data continued to redefine the Fed’s interpretation of “transitory”. The whole affair smelled strongly of somebody, or somebodies, being forced out of bad positions. On Friday, the word was that the giant macro-hedge fund Rokos was forced to exit bad curve steepners and perhaps cover short, short-dated volatility positions as implied volatilities exploded higher. Meanwhile, stocks ignored the whole drama and ground higher to set new all-time highs! It was funny how the S&P and NASDQ indices continued to scream higher even as Amazon and Apple earnings disappointed.
- The S&P 500 rose 1.3%. The index hit another new all-time high on Friday. The average daily move was 0.47%.
- The NASDQ climbed 2.7%, also hitting a new all-time high Friday. The average daily move for the week was .54%.
- The 2-year Treasury yield rose 4 basis points for the week closing .50% on Friday, a new high for the year. Year to date high yield .50%, low yield .10%.
- The 10-year Treasury yield fell 7 basis points for the week, closing at 1.56% Friday. Year to date high yield 1.74%, low yield .91%.
- The VIX Index rose 5% for the week, closing at 16.26 Friday. Year to date high 37.21 and low 15.07.
- The MOVE Index increased 4.7% for the week, closing at 75.45 on Friday. Year to date high 75.66, and low 42.53.
- 5-year Investment Grade Corporates (as measured by Markit CDX) were unchanged for the week closing at 52 basis points Friday. High spread Year to date 58.07 and low of 46.56. High Yield corporate debt (as measured by Markit CDX) widened 2 basis points, closing at 304 basis points on Friday. High spread year to date 319, low 269.
- US Dollar Index advanced 0.5% for the week, closing at 94.12 on Friday. High reading Year to date 94.52, low 89.44.
- WTI Crude was largely unchanged for the week using the December WTI Futures contract, closing at 83.57 Friday. High price for the front contract year to date 83.76, low 47.62.
- Gold, as measured by the December 2021 futures contract, increased 0.7%% for the week closing at 1,784 on Friday. High price for the front contract year to date 1,954, low 1,678.
- Bitcoin rose 2.7% for the week, closing at 62,395 Friday. High price year to date 65.996, low 29,865.
The Week Ahead
We come into the week with global equities up strongly, ignoring more poor economic data out of China. In rates, the Treasury curve continues to gyrate with the 20-year still behaving like a like a drunken sailor. Breakevens are up a fair amount with best performance in 5-years. For stocks, a mostly positive earnings season rolls on. Forward guidance has not been as awful with regard to inflation projections as some feared. The big event this week is the FOMC meeting that begins on Tuesday and ends Wednesday with the statement and press-conference.
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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John Tuohy is CEO of SWBC Investment Services, LLC, a Broker/Dealer and SWBC Investment Company, an SEC Registered Investment Advisor (RIA). In his role, John is responsible for identifying, developing, and executing the division's strategic plan and all business development, sales, and marketing activities.
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