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Market Commentary: Week of September 14, 2020


What Happened

Equities had their second tough week in a row as some of the biggest winners of the “COVID Rally” have given up a portion of their gargantuan gains. The pull back in the big tech stocks continued this week. As an example, Apple is now only up 78% from mid-March. The horror!

Meanwhile, the corporate debt markets ignored stocks with investment-grade corporates holding steady and high yield actually tightening. Back in March, we were worried that the $1.3 billion leveraged loan market was ready to get smashed, setting up a disaster for the $600 billion CLO market as well as the multi-billion leveraged loan mutual funds and ETFs. Now, investors are snapping up these products in a frenzy. The LTSA Leveraged Loan Index ended Friday at 93.74, while back in March, it hit an all-time low of 76.23. The Fed should stop looking far and wide for any inflation created by their policies. The inflation is right in front of their face—high yield loans and bonds.

  • The S&P 500 declined 2.5% for the week. The average daily move for the week was 1.32%.

  • The NASDAQ declined 4.07% for the week. The average daily move for the week was 1.88%.

  • The 2-year Treasury declined 1.6 bps on the week, closing .129% Friday.

  • The 10-year Treasury declined 5 basis points for the week, closing at .67% Friday.

  • The VIX Index declined 13% for the week closing at 36.87 Friday.

  • The MOVE Index decreased 8%, closing at 43.12 Friday.

  • 5-year Investment Grade Corporates (as measured by Markit CDX) widened two basis points for the week, closing at 70 basis points Friday (from March 1st; high 152 bps, low 65 bps). High yield corporate debt (as measured by Markit CDX) tightened 20 basis points, closing at 358 basis points (from March 1st; high 871, low 364).

  • S. Dollar Index increased 0.6%, closing at 93.33 on Friday.

  • WTI Crude declined 6% the week using the October WTI Futures contract, closing at 37.33.

  • Gold, as measured by the December 2020 futures contract, increased 0.7% closing at 1,947 on Friday.

What’s Going to Happen

Equities are opening up strongly across the board this morning. Buying the dip mentality is still alive and well—it will be interesting to see if it holds. Recently, history tells us absolutely! The big event this week is the Federal Reserve FOMC meeting with the announcement and press conference on Wednesday. We expect a pretty sober outlook from the committee and a promise to keep the accommodation hose on full force. That should be nice and comfortable for risk assets. We would not be surprised to see equity indices make new all-time highs. The caveat to the bullish equity outlook is crude. WTI futures continue to trade off this morning. We will see if that affects the mighty stocks. With regard to rates markets, we had a big supply week last week with the two-year, 10-year and 30-year auctions. The market absorbed the supply quite well. We think the FOMC will serve to steepen the curve with the long-end underperforming.

 

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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