Read the 10 stories to remember from the week which ended September 4.
Story #1: An August to remember
The S&P 500 climbed more than 7% last month, posting its best August result since 1986 and recording seven record daily closing highs along the way. Information technology was the best performing sector with a 12% gain. Developed markets (+6.7%) continued to outperform Emerging Markets (+2.2%). Japan Topix (+8.2%) was the best performing country. Credit also rallied, while global government bonds fell by 0.2% over the month. Commodities were up 6.8% as the dollar weakened.
Story #2: Thursday reversal
Stocks’ relatively steady climb since late June was interrupted on Thursday as the Nasdaq tumbled 5% and the Dow fell nearly 3%. The declines came a day after the Nasdaq topped the 12,000-point mark for the first time and the Dow eclipsed 29,000 for the first time since February. There was no specific reason for this reversal but it seems that a simultaneous unwinding of big tech stocks call options and long index hedges could be the explanation. Huge demand for call options to bet on mega cap tech stocks could have fed gains in the Nasdaq as dealers hedged. Profit taking on some of these trades triggered an unwinding of the hedges and then a negative feedback loop.
Story #3: A spike in the VIX index
The Cboe Volatility Index, which measures investors’ expectations of short-term stock market volatility, climbed on Friday to as high as 38 in intraday trading, its highest level in more than two months. However, the so-called VIX remained far below its record closing high of around 83 set in mid-March of this year.
Story #4: Tech-heavy Nasdaq led US equities lower
On the back of Thursday sharp pull-back and further weakness on Friday, the stock market’s five-week winning streak was snapped as the NASDAQ dropped more than 3% over the week, its worst week since March. Still, the Nasdaq produced significant gains on a year-to-date basis. The S&P 500 fell around 2% and remained positive for the year. However, the more narrowly focused Dow Jones Industrial Average slipped back into negative territory for 2020. Value stocks lost ground but held up better than their growth counterparts.
Story #5: WTI Crude Oil trades below $40
The week’s volatility extended to oil, as the price of crude dropped around 8%, below the $40 per barrel mark for the first time in more than a month. After a surge in volatility in the early spring, oil prices have remained close to the $40 level since early June.
Story #6: Anti-fragile assets didn’t provide much help to investors
As equity markets nose-dived on Thursday and Friday, the so-called “anti-fragile” assets (precious metals, cryptocurrencies) declined as well. Gold was slightly down on Thursday but continues to trade not too far away from the key $2,000. Silver trades $2 below August highs. The price of bitcoin fell around 10% for the week to around $10,600, the lowest level in more than a month. However, on a year-to-date basis, bitcoin is up around 45%. Ethereum pulled back sharply from intra-week high but managed to get back to even over the week.
Story #7: US Treasury Yield ticks higher after US jobs report
The sell-off in equities, month-end portfolio rebalancing, and Federal Reserve debt purchases drove the yield of the 10-year U.S. Treasury note lower early in the week. However, demand for Treasuries waned after the release of Friday’s employment report, which showed that US employers added 1.4 million jobs in August, a number in line with consensus estimates. However, the unemployment rate, which is based on a separate survey, fell more than expected, dropping to 8.4% in August from 10.2% in July. On the back of this report, the long end of the curve steepened with US 10-year bond yields coming back to 70 basis points, despite the stock meltdown.
Story #8: The Dollar strengthened for the first time in 10 weeks
The strong US job report and growing speculation that the ECB would have to act soon to counter a stronger euro led to a rebound of the greenback this week after 9 consecutive weeks of decline. Indeed, an early estimate of eurozone consumer prices showed inflation of -0.2% in August—the first decline since May 2016—heaping more pressure on the European Central Bank (ECB) to increase stimulus. Policymakers seemed to be uneased with euro strength when the euro briefly rallied to more than USD 1.20 for the first time since 2018, prompting ECB Chief Economist Philip Lane to say the euro-dollar rate “does matter” for monetary policy.
Story #9: European shares pulled back in sympathy with the decline in U.S. equities.
European shares pulled back in sympathy with the technology-led decline in U.S. equities. However, news of merger talks between Spanish lenders Bankia and CaixaBank helped to curb losses. In local-currency terms, the pan-European STOXX Europe 600 Index ended the week 1.76% lower. In France, Finance Minister said they could extend the emergency furlough scheme beyond 2020 if the economic crisis worsens. His comments suggested France was ready to expand its EUR 100 billion stimulus plan unveiled earlier in the week. Meanwhile, there was growing pessimism that the UK and EU trade talks next week will break the impasse between the two sides, after Prime Minister Boris Johnson said the UK would look to double its fishing quota.
Story #10: China stocks declined despite encouraging manufacturing surveys
Mainland Chinese stock markets fell, with both the large-cap CSI 300 and benchmark Shanghai Composite Index shedding 1.5% following the overnight sell-off on Wall Street. The yield on China’s 10-year bond increased and ended the week at 3.14%. Official and private purchasing managers’ index (PMI) readings for August showed that China’s recovery continued, albeit at a slower pace. Both the official and Caixin/Markit surveys of manufacturing activity remained firmly in expansionary activity, with the private Caixin/Markit manufacturing gauge signaling the fastest expansion rate since January 2011. In the near term, analysts expect to see more evidence that economic activity is rebounding in China, where the coronavirus has largely been contained.
Source picture: Hedgeye
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