CAPITAL MARKETS WEEKLY UPDATE - Leumi USA

CAPITAL MARKETS WEEKLY UPDATE

Things That Make You Go Hmmm…

By: George Boyan

Every four years, the uniquely American Presidential election causes the political climate in the United States to heat up.  Last week President Trump and former Vice President Joe Biden took to the stage to make their case to the American people.  Just a few days later, the White House announced that President Trump tested positive for COVID-19 and was admitted to Walter Reed National Military Medical Center.  Odds makers viewed both these events as positives for Mr. Biden, and the S&P 500 Index has rallied since Mr. Trump’s diagnosis.  While I certainly have my own political predispositions, I am reminded of a Berkshire Hathaway annual shareholder meeting where Warren Buffett demonstrated that markets rally under both Republican and Democrat administrations and that the key to growing wealth is patience and maintaining a long time horizon.  Both are traits that I wish were more deeply held in Washington, D.C.

Macro Commentary: 

By: Ariel Segal

Nonfarm payrolls were lower than expected on Friday with 661,000 jobs added vs the survey consensus of 859,000 jobs. The Unemployment rate fell from 8.4% to 7.9% in September, but this is partially due to the decline in the Labor Force Participation Rate from 61.7% to 61.4%, indicating that some Americans have quit even looking for work. The industries that suffered the largest jobless in September were state and local government education as well as educational services.

Mayor Bill de Blasio is looking to reinstate lockdown restrictions on 9 zip codes in NYC that have seen a surge in Covid-19 cases. Schools and non-essential businesses including indoor and outdoor dining will be closed if Gov. Cuomo approves.

Fixed Income Market:

By: Joseph Colleran

The credit markets saw another wave of spread widening last week, bringing the cumulative two-week backup to 15bps in IG and 50bps in HY.  It’s not coincidental that HY bond funds saw a notable outflow of $3.6BLN on the week (see below).  Despite this widening in spreads, new issue volumes were unaffected and continue at a record pace.  September marked the sixth out of seven months that have set all-time highs in issuance. As mentioned in previous writings, these issuance volumes are unprecedented and we have already surpassed the previous annual record with a full quarter still ahead.  

Client activity remains light in secondary bonds and continues to be focused in the Latam sector.   Meanwhile, demand has remained steady for New Issue Structured Notes, and has been supported by the continuing uptrend in equities as well as the high volatility levels. 

   Lipper Fund flow data for the week showed:       

     Domestic Equity Funds   down   $ 3.3BLN

     IG Bond Funds                     up      $2.1 BLN

     HY Bond Funds                  down   $3.6 BLN 

     Municipal Bond Funds      down    $660 MLN

     MMKT Funds                      down   $13.9 BLN

Prior Week: 

     Domestic Equity Funds   down   $6.1 BLN

     IG Bond Funds                     up     $5.2 BLN

     HY Bond Funds                   up     $520 MLN

     Municipal Bond Funds      up      $502 MLN

     MMKT Funds                   down   $50.5 BLN

U.S Equities:

By: James Zurovchak

Last week DJI led the markets higher with a 1.88% gain.  S&P and NASDAQ followed with gains of 1.54% and 1.50% respectively. All three indices continue to trade around major support/resistance levels where the 20 day SMA is at the 50 day SMA.  The question still remains whether we get the “20-50 cross” lower or a bounce off the 50 day SMA with a move higher.  10 of the 11 GIC sectors were positive on the week with Real Estate, Financials, Utilities and Consumer Discretionary all putting in strong performances. Energy continued its weakness as the lone negative sector.   Last week value slightly outpaced growth 2.21% vs 1.54%.  Market drivers this week include the continued global resurgence of Covid-19. The wild card thrown out on Friday was the President’s contraction of Convid-19 and his admission to Walter Reed for treatment.  Questions abound on what this could mean to the election race, and even his ability perform his duties.  The news thus far is that he seems to be recovering without difficulty and could leave the hospital as early as today. Somewhat surprisingly is that volatility has been muted with the VIX continuing to stay in the high 20’s.  

Foreign Exchange:

By: Anthony Minardo

The U.S. Presidential elections continue to be at the forefront, and President Trump’s positive COVID-19 test brings added uncertainty to the elections. The US dollar should be supported against the majority of the G-10 currencies but weaken against the safe-haven currencies like the JPY and CHF.

The USD will continue to react to headlines regarding our fiscal and monetary policy with the FOMC minutes being released on Wednesday.  The discussion of any additional fiscal easing could help support the equity market and boost risk sentiment.

Financial Planning:

By: Brian Stigliano

Life Insurance Premium Financing

Permanent forms of life insurance like whole life and universal life are often key elements of a comprehensive financial plan.  This is particularly true when it comes to estate planning for high-net-worth and ultra-high-net-worth individuals/families.  They often see the need for the insurance, but may not want to allocate their assets to what can be quite substantial premium payments.  They may prefer to continue to reinvest in their companies or may not want to liquidate an asset in order to keep income taxes as low as possible. 

In those circumstances, financing the insurance premiums can be a perfect solution.  The premiums would be paid by taking a loan from a third party (typically a bank).  The loan interest is generally paid on an annual basis with the loan principal being repaid in the future, possibly from the cash value accumulation in the insurance policy.  With the right design, this strategy can possibly provide a better internal rate of return (IRR) than paying the premiums out of pocket.  

Since premium financing is a complex and customized strategy, it’s best to meet with a CFP® professional, wealth manager, or insurance professional to see what design would best meet one’s needs. 

Last Week's Economic Data 10/5

Last Week's Economic DataActualSurvey
Wholesale Inventories MoM0.5%-0.1%
CPI MoM0.4%0.3%
GDP Annualized QoQ-31.4%-31.7%
Factory Orders0.7%0.9%
Durable Goods Orders0.5%0.4%
Unemployment Rate7.9%8.2%
Change in Nonfarm Payrolls661k859k
This Week's Economic DataRelease DateSurvey
Trade Balance10/6/20-$66.2b
Initial Jobless Claims10/8/20820k
Wholesale Inventories10/9/200.5%

This Week's Economic Data 10/5

Interest RatesCurrentWoWMoMYoY US Swap SpreadsCurrentWoWMoMYoY
1 Month Libor0.14%(0.4 bp)(1.2 bp)(183.5 bp)12-Month+10 bp(1.8 bp)(2.2 bp)(1.6 bp)
3 Month Libor0.22%(0.0 bp)(2.8 bp)(180.7 bp)2-Year+9 bp(1.1 bp)+0.3 bp(0.2 bp)
6 Month Libor0.23%(3.6 bp)(5.8 bp)(171.7 bp)3-Year+8 bp(1.6 bp)+0.3 bp+2.0 bp
12 Month Libor0.35%(1.7 bp)(7.2 bp)(150.4 bp)5-Year+7 bp(0.9 bp)+1.9 bp+3.6 bp
Fed Funds Effective0.09%(176.0 bp)7-Year+2 bp(1.6 bp)+1.3 bp+5.7 bp
SOFR0.10%+0.0 bp+1.0 bp(175.0 bp)10-Year+2 bp+7.0 bp+6.3 bp+56.0 bp
US Treasury YieldsCurrentWoWMoMYoY30-Year(37 bp)+8.5 bp+9.7 bp+79.4 bp
12-Month0.12%+0.8 bp(0.3 bp)(146.4 bp)Equity MarketsCurrentWoWMoMYoY
2-Year0.14%+1.4 bp(0.4 bp)(126.5 bp)Dow Jones 28,037 +1.3%(0.3 %)+5.5%
3-Year0.18%+3.5 bp+0.5 bp(118.0 bp)S&P 500 3,395 +1.4%(0.9 %)+15.0%
5-Year0.32%+6.0 bp+1.9 bp(102.9 bp)NASDAQ 11,278 +1.8%(0.3 %)+41.3%
7-Year0.53%+8.3 bp+2.8 bp(91.3 bp)CurrenciesCurrentWoWMoMYoY
10-Year0.76%+1.4 bp(0.4 bp)(126.5 bp)Euro1.1783+1.0%(0.3 %)+7.4%
30-Year1.56%+1.4 bp(0.4 bp)(126.5 bp)Japanese Yen105.7500(0.2 %)+0.5%+1.4%
US Swap Rates vs 3MLCurrentWoWMoMYoYBritish Pound1.2967+1.0%(1.5 %)+5.5%
12-Month0.21%(1.0 bp)(2.5 bp)(147.9 bp)Canadian Dollar1.3273+0.7%(1.3 %)+0.3%
2-Year0.23%+0.3 bp(0.1 bp)(126.7 bp)Australian Dollar0.7179+1.5%(1.3 %)+6.6%
3-Year0.26%+1.9 bp+0.9 bp(116.0 bp)Swiss Franc0.9157+1.0%+0.0%+8.6%
5-Year0.39%+5.1 bp+3.8 bp(99.3 bp)Israeli Shekel3.4071+1.9%(0.8 %)+2.9%
7-Year0.55%+6.7 bp+4.1 bp(85.6 bp)Bitcoin 10,725 (1.3 %)+5.6%+30.5%
10-Year0.77%+8.4 bp+5.9 bp(70.5 bp)CommoditiesCurrentWoWMoMYoY
30-Year1.19%+9.9 bp+9.3 bp(47.1 bp)Gold 1,913 +1.7%(1.1 %)+27.2%
Silver24+2.6%(9.7 %)+38.5%
Copper295(1.2 %)(3.0 %)+15.3%
Crude Oil39(2.8 %)(0.8 %)(25.3 %)
Ariel Segal | Treasury Analyst
350 Madison Avenue, 4th floor | New York, NY 10017
Tel: 212.626.1199 | ariel.segal@leumiusa.com  

IMPORTANT DISCLOSURES

The opinions voiced in this material, including without limitation the statistic information herein, are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual. The economic or market analyses or forecasts in this material reflect the views of the individuals who prepared them and do not necessarily represent the position of Bank Leumi USA, Leumi Investment Services Inc. or of other units of the worldwide Leumi Group. The analyses and forecasts should not be construed as a recommendation to buy or sell, or the solicitation of an offer to buy or sell any securities, currencies, or financial instruments.

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