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Market Commentary: Week of September 8, 2020


What Happened

Last week was dominated by the “Big Tech Gets Theirs” story. The tech-heavy NASDAQ declined over 3% for the week, including a 5% rout on Thursday. The index is still up 65% from the COVID-inspired low set in March. Why? The story that has dominated the headlines was that the Japanese venture capital group Softbank had a tremendous upside option bet on the biggest of big tech, paying up to $4 billion in option premium, and now the trade is starting to turn against them. We guess they were rolling the bones to make up for the WeWork fiasco! Tremendous upside option bets on the tech sector could explain why the NASDAQ in particular skyrocketed as much as it has since March, as whomever is short those options has to delta hedge a massive position, getting shorter as the market moved higher. The option writers have to buy, which in turn drives the market higher in a vicious cycle.

In other news, the August BLS Employment Report came in better than expected, which is good. The problem some have with the employment picture is that the job gains we are seeing are about the last of the low-hanging fruit being picked. Granted, the unemployment rate is a lot better now than we thought it would be a few months ago. Still, headlines are dominated by large-scale job cuts and furloughed workers being told their job loss is no longer temporary.

  • The S&P 500 declined 2.3% for the week. The average daily move for the week was 1.37%.

  • The NASDAQ declined 3.26% for the week. The average daily move for the week was 1.85%.

  • The 2-year Treasury increased 1.7 bps on the week, closing at 0.142% Friday.

  • The 10-year Treasury ended flat for the week, closing at .72% Friday.

  • The VIX Index increased 34% for the week, closing at 30.75 Friday.

  • The MOVE Index decreased 2%, closing at 47.04 Friday.

  • 5-year Investment Grade Corporates (as measured my Markit CDX) were flat for the week closing at 68 basis points Friday (from March 1st High 152 bps Low 65 bps). High Yield corporate debt (as measured my Markit CDX) widened 7 basis points, closing at 378 basis points (from March 1st High 871, Low 364).

  • US Dollar Index was flat for the week, closing at 92.719 on Friday.

  • WTI Crude declined 7.5% the week using the October WTI Futures contract, closing at 39.77

  • Gold, as measured by the December 2020 futures contract, declined 2%, closing at 1,934 on Friday.

What’s Going to Happen

Equities have started the week extending losses from last week. Corporate debt has been hanging in there. With new issue records being smashed, we’ll see if investors let what is happening in stocks spill over into investment grade and high yield debt. Crude is getting pasted this morning with the WTI October Future down over 7%. We will see if that eventually spills over into the high yield debt markets, already besieged with high levels of bankruptcies and failures. Is this the beginning of the end of the risk rally? Probably not. Inflation data dominates the economic calendar this week, and of course the closely-watched jobless claims data on Thursday.

 

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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