Source: Venn by Two Sigma as of March 18, 2020 using the USD version of the Two Sigma Factor Lens.

Time period: March 9 - 13, 2020.

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Markets and Factor Performance Summary

• A tumultuous week in the markets started with activity on Sunday, March 8th. Saudi Arabia announced oil price cuts for consumers in Asia, Europe, and the United States. This announcement came after Russia failed to reach an agreement with OPEC and other oil producers to cut production. The supply shock was layered onto the decrease in demand resulting from the global coronavirus outbreak and sent oil prices over 20% lower.¹
  • The global Equity factor fell 7.33% on Monday, March 9th. 
  • The Credit factor was also severely impacted, down 5.38% on March 9th, even after it was residualized to the Equity and Interest Rates factors. Energy company issuers (that could default as energy prices fall) constitute over 10% of the U.S. high-yield market.²
  • The Commodities factor was down 0.92% on March 9th, despite oil prices nosediving. The factor’s underlying index (which has a target weight of ~30% to energy commodities) suffered 4.15% that day.³ However, the factor removes the return from shared risks with the Equity and Interest Rates factors. As an example, the index’s recent 0.4 beta to the Equity factor indicated that a little less than half of Equity’s 7.33% losses were “added back” in constructing the residualized Commodities factor.⁴
• Global stocks recovered on Tuesday, but returned to their downward trend on Wednesday and Thursday amid various coronavirus-related news, such as President Trump’s announcement of a European travel ban to limit the spread of the coronavirus.⁵
• Equity markets bounced back on Friday afternoon on optimism around President Trump’s news conference and Congress’ progress toward a coronavirus aid package.
  • The Equity factor posted 5.52% gains on Friday, ending the week -11.30%. 
    • The Local Equity factor was partly supported by the U.S. outperforming global equity markets last week, pushing ahead on Friday afternoon when other markets were closed.
    • In terms of the equity style factors, the Quality factor posted the largest gains with the Profitability component leading the pack (indicating that companies with higher profitability outperformed their less profitable counterparts). Low Risk on the other hand continued its losses from late February, after a brief recovery the first week of March. Losses appear to be driven primarily by the “betting against beta” component (i.e. stocks with lower betas underperformed stocks with higher betas).⁶
• The Interest Rates factor actually ended the week -2.01%. 10-year government bond yields in countries such as the U.S., Germany, and the U.K. ended the week higher after initially dropping on Monday.⁷

REFERENCES

¹Sources: NPR article “Oil Prices, Stocks Plunge After Saudi Arabia Stuns World With Massive Discounts” on March 8, 2020 and Trading Economics.

²Source: Financial Times article “Oil price war spells danger for US junk bonds” on March 8, 2020.

³Source: Bloomberg.

⁴Source: Venn.

⁵Source: Reuters article “Plunging Wall Street stocks end record bull run” on March 11, 2020.

⁶Source: Venn.

⁷Source: Trading Economics.

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