Capital Markets weekly update - Leumi USA

Capital Markets weekly update

 Macro Commentary: 

As expected, the Fed kept its target rate range at 0%-0.25% on Wednesday. Chair Powell said “we’re not going to be in any hurry to move rates up” after being questioned for clarity on the Fed’s forward guidance. 

Since March 20th, initial unemployment claims have totaled approximately 33.5 million, setting the stage for the worst unemployment rate since the Great Depression. Bloomberg’s survey currently has a 16% estimate, but this may increase as Friday approaches with some economists believing unemployment to be closer to 20%. 

U.S. cases of the Covid-19 rose 2% to 1.17 million and the White House has increased its projection of total deaths. In a promising step in the fight against the virus, an antibody has been created by scientists has the ability to defeat the virus within a controlled lab setting. It is a significant, though early step. 

Fixed Income Market: 

Last week saw the corporate bond market post another relatively stable performance. Investment grade spreads were marginally tighter versus UST’s while High Yield bonds ended the week approximately 10-15 basis points wider. All the HY widening occurred on Friday in sympathy with the selloff in the equity markets. Secondary trading volumes continue to edge higher; however, the biggest story remains the US New issue Bond market which continues to set records – the new supply flows in April eclipsed all time high levels for a single month. The biggest name in the market was Boeing which successfully sold $25 billion in seven tranches. Overall demand for the bonds exceeded $70 billion and in the secondary markets, all seven issues are trading at premiums to their initial pricing levels. 

U.S. Equities: 

The greatest investor of all time, Warren Buffett, held the Berkshire Hathaway, Inc (NYSE: BRK/A) annual meeting of shareholders in a completely virtual presentation on Saturday evening. One of the major themes of the Oracle of Omaha’s opening monologue was “Never Bet Against America.” He reiterated that this young republic has been through trials and tribulations before, but that there has never been a time or a place in human history better than to be an American in 2020. And although there is uncertainty in today’s economy, Mr Buffett’s thesis is that the United States and its capitalist system will endure. The company recently sold its stake in the commercial airline companies, but otherwise has been quiet, looking for elephant sized acquisitions at attractive prices. 

Foreign Exchange: 

Risk sentiment continues to dominate the currency markets during the COVID-19 pandemic. Several countries have started the early phases of re-opening their economies, combined with potential treatments for the virus being approved by the FDA, has seen increased optimism in the market. On the contrary the increase tensions between the U.S, and China could shift our focus, which would add support to the JPY, CHF, and EUR. Major economic data releases this week consist of the April employment report, initial jobless claims and ISM non-manufacturing. The overall consensus is for dismal numbers, however, if the number comes in weaker than forecast it could potentially weigh further on the dollar. 

Financial Planning: 

The Importance of Asset Location 

When building a portfolio, most of the focus tends to be on having the proper asset allocation balancing the tradeoffs between risk and return. Once an asset allocation has been determined, however, the asset location is often overlooked. 

Asset location is a strategy that helps to minimize taxes by holding different investments in different account types. Since both different investments (i.e. – stocks, bonds, REITs, ETFs, mutual funds, etc.) and different account types (i.e. – brokerage, IRA, Roth IRA, trusts, etc.) each have their own various tax treatments, there can be advantages to be unlocked with proper planning. 

Some things to consider prior to optimizing your asset location are your current marginal income tax rate, your anticipated future marginal income tax rate, and your investment timeframe. In general, an asset location strategy can be more meaningful for someone who is currently in a high marginal income tax bracket, expects to be in a lower marginal income tax bracket in the future (i.e. – in retirement), and has a timeframe of more than 10 years. 

Last week's economic data May 4th

Last Week's Economic Data Actual Survey 
Wholesale Inventories MoM -1.0% -0.4% 
GDP Annualized QoQ -4.8% -3.8% 
FOMC Rate Decision (Upper Bound) 0.25% 0.25% 
Initial Jobless Claims 3839k 3500k 
Factory Orders (Released Today) -10.3% -9.7% 
Durable Goods Orders (Released Today) -14.7% -14.4% 

This Week's Economic Data May 4th

This Week's Economic Data Release Date Survey 
Trade Balance 5/05/20 -$44.2b 
ADP Employment 5/06/20 -20000k 
Initial Jobless Claims 5/07/20 3000k 
Change in Nonfarm Payrolls 5/08/20 -21250k 
Unemployment Rate 5/08/20 16.0% 

Market movement May 4th

Interest Rates Current WoW MoM YoY 
1 Month Libor 0.26% (17.5 bp) (72.2 bp) (220.4 bp) 
3 Month Libor 0.50% (34.0 bp) (88.7 bp) (205.9 bp) 
6 Month Libor 0.70% (18.9 bp) (50.4 bp) (191.3 bp) 
12 Month Libor 0.83% (9.7 bp) (22.1 bp) (191.7 bp) 
Fed Funds Effective 0.05% (1.0 bp) (240.0 bp) 7-Year 
SOFR 0.03% +2.0 bp (251.0 bp) 10-Year 
US Treasury Yields Current WoW MoM YoY 
12-Month 0.14% (2.3 bp) +1.3 bp (225.0 bp) 
2-Year 0.18% (4.0 bp) (4.7 bp) (215.1 bp) 
3-Year 0.24% (4.5 bp) (5.8 bp) (205.8 bp) 
5-Year 0.36% (4.0 bp) (2.1 bp) (196.0 bp) 
7-Year 0.53% (3.5 bp) +1.4 bp (189.9 bp) 
10-Year 0.63% (4.0 bp) (4.7 bp) (215.1 bp) 
30-Year 1.28% (4.0 bp) (4.7 bp) (215.1 bp) 
US Swap Rates vs 3ML Current WoW MoM YoY 
12-Month 0.36% (6.8 bp) (29.8 bp) (217.7 bp) 
2-Year 0.32% (4.0 bp) (17.6 bp) (208.3 bp) 
3-Year 0.32% (3.2 bp) (16.0 bp) (200.4 bp) 
5-Year 0.41% (2.3 bp) (14.5 bp) (189.9 bp) 
7-Year 0.51% (0.9 bp) (11.7 bp) (184.6 bp) 
10-Year 0.63% +0.7 bp (8.6 bp) (182.1 bp) 
30-Year 0.81% +4.1 bp (4.9 bp) (182.9 bp) 
Silver 15 (2.6 %) +2.7% (1.1 %) 
Copper 233 (1.0 %) +6.1% (17.6 %) 
Crude Oil 21 +66.1% (25.1 %) (65.7 %) 
US Swap Spreads Current WoW MoM YoY 
12-Month +22 bp (4.5 bp) (31.1 bp) +7.3 bp 
2-Year +13 bp (0.0 bp) (13.0 bp) +6.8 bp 
3-Year +8 bp +1.3 bp (10.3 bp) +5.4 bp 
5-Year +5 bp +1.7 bp (12.4 bp) +6.0 bp 
(1 bp) +2.7 bp (13.1 bp) +5.3 bp 
(0 bp) +4.7 bp (3.9 bp) +33.0 bp 
30-Year (47 bp) +8.1 bp (0.2 bp) +32.2 bp 
Equity Markets Current WoW MoM YoY 
Dow Jones 23,750 +0.1% +12.8% (10.4 %) 
S&P 500 2,843 +0.4% +14.2% (3.5 %) 
NASDAQ 8,711 +1.2% +18.1% +6.7% 
Currencies Current WoW MoM YoY 
Euro 1.0908 +0.8% +1.1% (2.6 %) 
Japanese Yen 106.7600 +0.1% +2.3% +3.7% 
British Pound 1.2442 +0.1% +1.7% (5.0 %) 
Canadian Dollar 1.4087 (0.6 %) +0.2% (4.5 %) 
Australian Dollar 0.6428 (1.0 %) +5.6% (8.1 %) 
Swiss Franc 0.9651 +1.0% +1.4% +5.5% 
Israeli Shekel 3.5303 (0.7 %) +1.7% +1.6% 
Bitcoin 8,936 +15.5% +23.6% +56.9% 
Commodities Current WoW MoM YoY 
Gold 1,702 (0.3 %) +5.0% +33.1% 
Ariel Segal | Treasury Analyst
350 Madison Avenue, 4th floor | New York, NY 10017
Tel: 212.626.1199 | ariel.segal@leumiusa.com  

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