In today's daily market updates, we are going to look at what happened in the fixed income, money market, commodities and U.S. equity markets yesterday (i.e. 11 Jul 2022).
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Past performance presented here is not an indicator of future performance.
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Fixed Income and Money Market
U.S. Treasury par yield curve continues to flatten with short-term rates rising and long-term rates falling as the market is waiting for the release of June’s core inflation figures this Wednesday (13 July 2022). In the previous Federal Reserve Open Market Committee (FOMC) meeting, Fed conveyed its strong commitment to bringing down inflation numbers via aggressive monetary policies even if it risks slowing down the entire U.S. economy. Fed would also consider further hiking rates if inflation remains elevated after its recent announcement of a 50 to 75 bps rate hike.
Benchmark 10-year - 2-year bond spread (calculated as 10-year par rate minus 2-year par rate) has been falling consecutively within the negative zone for 3 straight days. This has undoubtedly escalated the recessionary fears as yield inversion is conventionally treated as a predictor of recession.
The high-yield bond ETF (NYSEARCA: HYG) is exposed to more cyclical sectors and has more exposure to bonds that are rated BBB and below than the investment-grade bond ETF (NYSEARCA: LQD), therefore, subjected to a higher probability of default and hence more sensitive to the credit component. Investment-grade ETF is exposed to more stable sectors and has more exposure to highly rated bonds (rating BBB and above), hence less sensitive to the credit component but more sensitive to Fed's rate hike decision. When the economy is booming, high-yield bonds would usually outperform investment-grade bonds and the opposite would happen during a recession.
Investment-grade ETF, LQD rose by 0.28 % yesterday, boosted by the decline of treasury yields and flight-to-safety behavior resulting from the sluggish equity market and negative earnings expectations. High-yield ETF, LQD on the other hand, which historically is highly correlated with S&P 500 index fell by 0.56% yesterday as the equity market was in the red.
Near-term crude oil futures fell by 0.2 to 0.7% yesterday as Shanghai, China’s major city where global supply chains are concentrated fears a second lockdown due to the outbreak of Omicron BA.5 sub-variant.
Natural gas futures rebound sharply, making 5.1% to 6.5% gains in their near-term maturities as Russia shuts down the Nord Stream gas pipeline for 10 days of repairs.
S&P 500 ETF fell by 1.14% yesterday, and all other factor ETFs were falling as well. The innovation factor (represented by ARK Invest’s flagship innovation ETF) fell the most, by 6.91% just yesterday itself. On the other hand, large-size ETF and high-quality ETF fell more than the market ETF, by 1.32% and 1.16% respectively.
The utility sector was the only sector that held up yesterday, while the others were falling sharply, with cyclical sectors like consumer discretionary and retail falling the most.
According to Investopedia, Value-at-Risk is defined as:
A statistic that quantifies the extent of possible financial losses within a firm, portfolio, or position over a specific time frame. This metric is most commonly used by investment and commercial banks to determine the extent and probabilities of potential losses in their institutional portfolios.
Although Bitcoin’s large drawdown risk decreased slightly based on observed historical data, with a decreasing negative skew (i.e. lesser probability of making losses than gains) and a lower kurtosis number (i.e. lower risk of large draw-down), its large drawdown risk still remained significant.
Based on the 30-day 95% historical Value-at-Risk (VaR) profile of Bitcoin above, Bitcoin’s downside risk has also been increasing as of 11 July 2022.
Texas crypto miners are switching off on the request of the nonprofit Electric Reliability Council as Texas power grids were challenged by the heatwave. Founders of now-defunct crypto hedge fund, Three Arrows Capital (Su Zhu and Kyle Davis) are nowhere to be found according to their liquidator, Teneo after filing for Chapter 15 bankruptcy.