The market spent another week roiled by the unfolding novel coronavirus epidemic, the extent of which is just starting to be felt in the U.S. The Federal Reserve surprised investors with an aggressive cut to interest rates, but it rattled rather than soothed nerves. Markets hate uncertainty as the saying goes, and right now nothing feels certain.
Despite the wild swings in stocks in recent days, all three major indexes are on track for modest weekly gains. Let’s take a look at what stood out in another stormy week.
Winners: Trading Desks and Day Traders
The capital markets are in turmoil. At least, they were on Thursday. On Wednesday, it was euphoria. On Tuesday, it was turmoil—and euphoria —and turmoil again, all within the same day.
The markets are in a state of extreme flux, given the rapidly progressing coronavirus epidemic. Because no one has an information edge, investors are largely trading on the latest headlines—an unpleasant idea, unless your business is filling buy and sell orders.
The market is more active than it has been in years. The S&P 500 on Thursday logged its fourth consecutive session with a move of at least 2%, its longest stretch since August 2011. On the New York Stock Exchange, the total trading volume for the five sessions through Wednesday was its highest since August 2011. On the Nasdaq, the five-day total was the highest since at least 2007, according to data from FactSet.
“Trading volumes have gone through the roof, and you’re probably going to see that for a while,” said Edward Moya, an analyst in New York at brokerage house Oanda. At his firm, which caters mainly to forex traders but also handles orders for commodities and equities products, the trading desk has been extremely busy lately, he said.
They are filling orders from both short-term, active traders trying to capture any sliver of the market’s gyrations, he said, and long-term investors trying to rebalance their portfolios to withstand damage to the market from the coronavirus.
“If we had to choose a reason for our volume to be up, we would not want it to be that one,” he said. But they don’t get to choose, and they do have to fill the orders.
“It’s reinvigorated a lot of interest,” he said.
Losers: Leveraged Loan Investors
The Fed’s surprise rate cut roiled the stock market and drove down bond yields, but it also put acute pressure on one particular corner of the capital markets: leveraged loans.
Leveraged loans are debt instruments that are issued by businesses, structured by banks and sold to sophisticated investors.
Over the past decade, this market had more than doubled in size to $1.2 trillion. It gets tapped by companies that can’t access investment-grade debt, including many bought by private-equity firms. All the big banks are involved in packaging and selling these loans.
Falling interest rates put this market under pressure because loan coupons—unlike most bond coupons—are pegged to the London interbank offered rate, or Libor, which itself is closely tied to the Federal Reserve’s benchmark federal-funds rate.
Lower interest payments make the assets less attractive to individual investors. As a result, this market has seen mostly outflows this year. For the week ended Wednesday, outflows totaled $2.3 billion, the worst week since the end of 2018, according to Refinitiv Lipper.
“Loan investors have good reason to feel snake-bitten,” Citigroup analyst Michael Anderson said in a note.
A weakening economy could also lead to lower earnings and tighter financial conditions for companies that have borrowed in the loan market, UBS analysts said. If that were to happen, “we expect default rates to rise,” they said.
The Week Ahead
Most economic reports haven’t yet captured the effects of the coronavirus epidemic. That dynamic is going to start changing Friday when the University of Michigan releases its preliminary March consumer sentiment survey. The February survey had hints of consumer fears, but the data were too few to be statistically significant. This report will more fully reflect what consumers have been thinking about the past two weeks.
Write to Paul Vigna at firstname.lastname@example.org
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