05/07/2020
Risk assets continue to hold their gains but have been mostly directionless for the past several weeks. The prevailing sentiment seems to be one of optimism in response to the economic reopening, tempered by the lack of forward operating visibility and muted fears of a second wave of virus infections. 

So far this week, stocks have risen modestly, with the S&P 500® index up 0.6 percent through Wednesday. The index continues to trade in a relatively narrow range around the 2850 level, where it has been for the past three weeks. The VIX index has edged lower on the week but remains elevated at the 32 level where it stood last Wednesday. The MSCI EAFE index of foreign developed market equities is so far lower by 1.4 percent on the week, leaving the index down 21 percent for the year in dollar terms, compared to the 12 percent decline in the S&P 500. The Emerging Market index is down 2 percent this week, and lower year-to-date by 19 percent.

Bond Yields and Crude Oil Move Higher 

Bond yields have edged modestly higher this week in a nod to the promise of firming economic activity and the realization that at $3 trillion, the U.S. Treasury’s borrowing needs this quarter are massive, close to 40 percent more than in any previous fiscal year. The yield on the ten-year Treasury note has climbed to 0.70 percent, its highest level since mid-April, from 0.61 percent last Friday. The two-year note has dipped just one basis point to 0.18 percent, not far from its September 2011 low of 0.15 percent. High yield bonds have slipped lower this week, down 8 basis points to 8.19 percent, exactly where they stood in mid-April. The spread over Treasuries has narrowed this week by 10 basis points to 760, also near its mid-April level. 

Crude oil has captured a lot of attention this week. In early Thursday trading, the WTI May futures contract has surged higher by $6.41, or 32 percent, to $26.19 a barrel. Oil had already been trading higher on the week before gaining further momentum on reports of price increases by Saudi Arabia. Brent crude jumped 6 percent to $31.59 a barrel following the news. The WTI May contract expires on May 20. and we will see if there is a repeat of the April contract expiration debacle when futures fell to -$38 a barrel. 

Economic Data Overseas Continues to Deteriorate; All Eyes on Friday’s U.S. Jobs Report 

Germany this week reported a larger than expected 9.2 decline in industrial production for March. In France, the decline was 16.2 percent. Italy reported a 21 percent drop in March retail sales. The European Commission forecast a decline in output this year in the Eurozone of 7.4 percent, while warning of the strain on the monetary union from the divisions between wealthier countries in the north and more indebted countries in the south. In China, import volumes through April remained weak, including a significant shortfall in buying from the U.S. relative to the Phase One trade deal. 

In the U.S, all eyes are on the April jobs report scheduled for Friday, expected to show a loss of 21 million jobs and a jump in the unemployment rate to 16 percent. The weekly new claims for jobless benefits have averaged 5 million over the past four weeks. But the weekly total has moderated from the 6.9 million peak on March 27 to last week’s total of 3.8 million. This week’s total of 3.2 million continued that moderating trend, although the absolute total remains staggering.

Important Disclosures:
Sources: Factset, Bloomberg

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The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees.

Morgan Stanley Capital International EAFE Index (MSCI EAFE), an unmanaged index, is compiled from a composite of securities markets of Europe, Australasia and the Far East.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.

The MSCI Emerging Markets Index captures large- and mid-cap representation across 24 Emerging Markets (EM) countries. With 843 constituents, the index covers approximately 85% of the free float?adjusted market capitalization in each country.

The MSCI Emerging Markets Index consists of the following 24 EM country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates, as of December 2017. 

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High-yield bonds are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds.Non-investment-grade (high-yield or junk) securities present greater price volatility and more risk to principal and income than higher rated securities.

West Texas Intermediate (WTI) is a grade of crude oil commonly used as a benchmark for oil prices. WTI is a light grade with low density and sulfur content.

A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.

A 2-year Treasury note is a debt obligation issued by the United States government that matures in 2 years.

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