Monday Newsletter 8.3.2020

3 things to know

  • - Equities ended the week mixed as U.S. indices increased on the back of positive earnings from tech titans – Amazon, Apple, Google, Facebook – while European stocks fell. Sentiment wavered as Q2 European corporate earnings broadly declined, Hong Kong postponed legislative elections and the U.S. Congress failed to make progress on another coronavirus relief bill as billions of dollars in US federal aid expired on Friday

  • - U.S. economic data varied as durable goods orders expanded by 7.3% and pending home sales increased for the first time in four months during June. But, the first estimate of the U.S. Q2 GDP growth rate showed that the economy contracted by an annualized rate of 32.9%, and weekly jobless claims increased for the second week (and 19thstraight week exceeding 1 million)

  • - Coronavirus cases passed 17 million globally as many countries – UK, Japan, Belgium, Germany, Spain – experienced rising infection rates. Country leaders reiterated their willingness to act quickly with stricter self-isolation rules and additional containment measures to stop the spread and ward off a potential second wave

What happened? U.S. equities gained on the week, buoyed by strong performance from tech companies. Risk appetites were tempered, however, by mixed corporate earnings and other weak economic data – including the U.S. and eurozone both reporting significant contractions in economic output over Q2. Against this backdrop, Fed Chair Powell warned of risks to the economic outlook and underscored supportive policy – including an extension to the central bank’s credit and lending facilities. Meanwhile, the U.S. dollar weakened considerably, recording its worst month (per the DXY) in nearly a decade against several developed market currencies

  • - Equities across the globe finished mixed over the past week as Hong Kong postponed legislative elections and US Congress failed to make progress on an another coronavirus relief bill. Despite the expiration of the US federal supplement to unemployment benefits on Friday, the S&P 500 rose on the week and notched a 5.5% gain for the month of July. This marked the S&P’s fourth straight month of gains

  • - Rates broadly fell across most developed markets. The Fed underscored expectations for low policy rates in the U.S. and the 10yr fell 6bps to set a new record low of 0.53%. Globally, less optimistic economic data and a resurgence in virus cases also contributed to lower yields. Rates in Germany, the U.K., and Japan generally all moved modestly lower on the week

  • - Credit spreads were relatively unchanged, with U.S. IG widening 1 bp over the week (16 bps tighter MTD). Flows remained solid with $10bn inflows into IG credit and $1bn into HY for the week ended July 29, while supply picked up with $21bn of IG issuance on the week week, bringing the July MTD total to $60bn. The Fed’s corporate bond buying slowed further, dropping to approximately $33mm purchases a day (total purchases at $12.25bn). Tender activity on the front end continued to increase amid low current market yields, with AT&T the most notable tender on the week

  • - Agency MBS spreads tightened following the rally of broader risk assets. The market continues to be supported by demand from banks, money managers, overseas investors and hedge funds in addition to Fed purchases

  • - Emerging Markets sectors – external and local debt – were up slightly on the week. A notable underperformer in both external and local debt was Turkey as the central bank continued to burn through its FX reserves in a bid to defend its exchange rate as the lira depreciated – raising market concerns again over the nation’s policymaking

  • - Muni yields rallied 2-7bps across the curve last week on persistent fund inflows – Lipper reported $1.8bn – and elevated levels of reinvestment capital. The week marked the 11th consecutive week of inflows into muni bond funds, pushing net year-to-date inflows to $3.1bn. There's an expected $39bn of bonds called or maturing in August compared to just $11bn in visible supply, a dynamic expected to provide a significant tailwind to the market

  • - Oil prices (Brent crude) were little changed, closing the week at $43.30/barrel. Prices rose mid-week amid modestly bullish data released by the DOE that indicated a meaningful drop in U.S. crude inventories. Prices, however, subsequently pared gains after labor market data added to signs of slowing economic momentum resulting from an elevated pace of virus cases

  • - Breakeven inflation rates in the U.S. rose steadily, ending the week up 5bps to close at 1.55%. Strengthening equities and index extension related buying drove rates higher

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