Market minute

Weekly analysis from the FS Research team

November 19, 2021

Market minute

Weekly analysis from the FS Research team

November 19, 2021

Equities

U.S. equities straddled all-time highs last week as yields
retreated amid fresh COVID concerns. Cases have turned
upward in the U.S. and continue to soar in Europe, where Austria
announced a lockdown and Germany considers one. Markets
fell back on their trusted pandemic trade, with the Nasdaq 100
gaining 2.31% as tech led and cyclicals and small caps lagged.
With real yields continuing to plumb all-time lows, relative
performance in equity markets (Nasdaq vs cyclicals) has shown
a strong 0.66 correlation to moves in the 10-year Treasury over
the past 3 months. Stocks in Europe lagged on the COVID
situation, while EM continues to be stymied by a stronger USD.

Fixed income

Benchmark yields slipped at the end of last week as focus
turned towards the worsening European COVID outbreak and
the economic implications of a fresh round of lockdowns. The
10-year U.S. Treasury yield tried for much of the week to push
higher but dipped on Friday to finish the week at 1.55%, down 2
bps. Fed rate hike expectations continue to point to almost 3
bps of rate hikes by the end of 2022. Credit spreads widened
modestly, and IG corporate performance fell –0.03% and high
yield fell –0.38% on the week.

Commodities

Crude oil ended at $76.10/bbl, the lowest weekly close in two
weeks as myriad factors weighed on prices. An upturn in COVID
cases in the U.S. and fresh lockdowns in Europe served to
dampen demand sentiment, while the threat of an SPR release
in the U.S. has ignited supply concerns. After months of
declines, lumber futures surged 48% on the week on
transportation issues in Canada. Gold held steady near 5-month
highs, supported by record-low real yields.

Economic overview

Retail sales surged in October, alleviating concerns that
households would flinch in the face of rising inflation. Retail sales
rose 1.7% in the month, and the “control” group that excludes
energy, food and building materials also jumped 1.6%, a sign
that consumption was broad-based. Some analysts pointed out
that consumers may be front-loading holiday purchases in the
face of supply-chain bottlenecks, but the overall tone of the
report was roundly upbeat. Regional manufacturing surveys for
November were notably strong. The New York manufacturing
survey hit 30.9 vs 22.0 expected, and the Philly Fed survey rose
to 39.0 vs 24.0 expected. Finally, housing starts slipped –0.7% in
October while building permits rose 4.0%. Both seem to be
returning to a pre-pandemic trend.

Source: World Health Organization, November 18, 2021

View disclosures

Equities
S&P 500: Leading single benchmark of large-cap U.S. equities, representing approximately 500 of the largest U.S. companies. Dow Jones Industrial Average: Price-weighted measure of 30 U.S. blue-chip companies. NASDAQ: Stock market index of stocks listed on the NASDAQ. Index is heavily weighted toward technology companies. Russell 2000: Index measuring performance of approximately 2,000 small-cap U.S. equities. MSCI World Index: Broad global equity benchmark including both developed and emerging markets. MSCI Europe Index: Equity benchmark that measures the performance of large and mid-cap equities across 15 developed countries in Europe. MSCI EAFE Index: Equity benchmark that represents the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East. MSCI Asia Index: Equity benchmark that captures large and mid-cap representation across developed market countries and emerging market countries in Asia. MSCI Emerging Markets Index: Equity benchmark representing 24 developing or emerging market countries, representing 10% of world market cap. For more info on these MSCI indices, visit MSCI.com. CBOE Volatility Index (VIX): Key measure of market expectations of near-term volatility conveyed by S&P 500 stock option price.

Credit
Bloomberg Barclays U.S. Aggregate Bond Index: Broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. Bloomberg Barclays U.S. Corporate Index: Measures the USD-denominated, investment-grade, fixed-rate bond market. Bloomberg Barclays U.S. Corporate High Yield Index: Measures the USD-denominated, high yield, fixed-rate bond market. S&P/LSTA U.S. Leveraged Loan Index: Market value-weighted index designed to measure the performance of the U.S. leveraged loan market.

Alternatives
FTSE NAREIT All Equity REITs Index: Free-float adjusted market cap-weighted index that includes all tax-qualified REITs listed in the NYSE, AMEX, and NASDAQ. S&P GSCI: First major investable commodity index. It is one of the most widely recognized benchmarks that is broad-based and production-weighted to represent the global commodity market beta. Alerian MLP Index: Leading gauge of energy MLPs, representing about 85% of total industry market cap. HFRX Global Hedge Fund Index: Index designed to be representative of the overall composition of the hedge fund universe, comprised of all eligible hedge fund strategies.

Commodities
Generic 1st Crude Oil (WTI Crude): Front-month West Texas Intermediate Crude Oil futures. Generic 1st Brent Crude Oil (Brent Crude): Front-month Brent Crude futures. Generic 1st Natural Gas: Front-month natural gas futures. Generic 1st Gold, 100 oz: Front-month gold (100 oz) futures.

Currency
Dollar Spot Index: Indicates the general international value of the USD by averaging the exchange rates between the USD and major world currencies. USDCNY: price of 1 USD in CNY (the Chinese renminbi, or yuan). Bitcoin: price of 1 Bitcoin in USD.

Spreads
Bloomberg Barclays U.S. Corporate Index: Measures the USD-denominated, investment grade, fixed-rate, taxable bond market. Bloomberg Barclays U.S. Corporate High Yield Index: Measures the USD-denominated, high yield, fixed-rate bond market. Bloomberg S&P/LSTA U.S. Leveraged Loan Index: Market value-weighted index designed to measure the performance of the U.S. leveraged loan market. Barclays EM USD Aggregate Index: Flagship hard currency emerging market debt benchmark that includes USD-denominated debt from sovereign, quasi-sovereign and corporate EM issuers.

Interest rates
Fed funds target: Target rate for the federal funds policy rate, set by the Federal Reserve each meeting. This rate is an “overnight rate,” i.e., it is the rate charged by depository institutions (banks) to each other for overnight loans. SOFR: Secured Overnight Financing Rate (SOFR) measures the cost of borrowing cash overnight collateralized by Treasuries. ICE 3-Month London Interbank Offered Rate (LIBOR): Average interest rate at which leading banks borrow funds of a sizable amount from other banks in the London market. LIBOR is the most widely used “benchmark” or reference rate for short-term interest rates. Treasury rates: Market yields for U.S. Treasury securities with maturities of 2, 10 and 30 years. Bloomberg Barclays U.S. Aggregate Bond Index: Broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. Bloomberg Barclays U.S. Corporate Index: Measures the USD-denominated, investment grade, fixed-rate, taxable bond market. Bloomberg Barclays U.S. Corporate High Yield Index: Measures the USD-denominated, high yield, fixed-rate bond market.

Sources: Bureau of Labor Statistics (BLS), Department of Labor, Bureau of Economic Analysis (BEA), International Monetary Fund (IMF), OECD, Federal Reserve, Institute for Supply Management (ISM), Mortgage Bankers Association (MBA), U.S. Census Bureau, Standard & Poor’s, Bank of America Merrill Lynch, Bloomberg, Macrobond.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

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