04.27.2020 – Weekly Market Update

By Chris Perras, CIO.

The Dow Jones Industrial Average DJIA, +1.10% closed 260 points higher on Friday, ending the week 1.9% down.  The Japan Nikkei (-3.2%) and German DAX (-2.7%) were the laggards.  Sector wise materials rocketing 11.1% (boosted by gold), tech (+4.5%), and energy (+2%) rounded out the top three. Financials (-4.2%), utilities (-3.3%) and telcos (-2.2%) were the laggards as safety and dividend sectors were punished.

Year to date, YTD, the S&P 500 is down (-12.2%), while the Nasdaq is down (-3.8%).  The NASDAQ 100 QQQ large cap tech index is marginally up YTD. Markets are set to open higher on Monday at the start of a big week of earnings. Dow futures are 0.9% up, while S&P 500 futures are 0.9% higher and Nasdaq futures are up 1.2%.

Behind the scenes, a point that almost no one has mentioned, we continue to see thawing in volatility markets, just as we first did around March 22-24.  For the first time since the stock market peak between February 19-21, the volatility futures curve has returned to a normal “contango” shape.  Recall, “contango” is the situation in futures pricing where the future price of a commodity is higher than the spot price of that same commodity. This results in a normal upward sloping forward pricing curve.

Japan is contemplating unlimited QE, and further increases in its purchases of commercial paper and corporate bonds.

Following the Fed on Wednesday, the European Central Bank will make its announcement on Thursday morning. The rumor mill is also on full tilt there, with speculation that it will start to accept junk bonds as collateral like the Fed has announced.

More glimmers of hope and optimism are merging, as parts of the world are starting to re-open. The pace is slow, but doors are opening.  Equity markets are starting the final stretch of April on a positive note, perhaps sparked by this hope. Last week was Austria, Denmark, Germany. This week, Spain, France and Italy will unveil their strategies to return to normal. Small shops in India will be allowed to re-open this week.

Later this week the Fed has its FOMC policy announcement on Wednesday.There are two things to watch out for on Fed Day:

First, the FOMC could announce additional support the flow of credit to businesses and households. So far, the Fed has deployed $165 bln of the new funds for increased purchases of corporate loans and bonds (now $750 bln) along with $600 bln of other business loans and $500 bln of shorter-term municipal securities. There is still $289 billion remaining to be deployed.

Second, reflecting the above the Fed’s balance sheet is skyrocketing ($6.6 trln).


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