Monday Newsletter 8.10.2020

3 things to know

  • - The U.S. experienced a better-than-expected July jobs report on Friday, as the economy added 1.8 million jobs last month, beating market expectations. The unemployment rate fell to 10.2% after three straight months of increased hiring. Despite the relatively positive report, only half of the jobs lost in the U.S. this year have been restored and Congress remained in a stalemate over additional fiscal stimulus
  • - Rising U.S.-China tensions captivated markets much of the week, as the Trump administration unveiled a cascade of actions against Beijing, including sanctions against 11 Chinese and Hong Kong officials, executive orders banning dealings with Chinese companies, WeChat and TikTok, and a recommendation to delist Chinese companies from U.S. exchanges should they not comply with U.S. accounting rules
  • - Coronavirus cases topped 19.4 million globally after an additional 2.4 million cases during the week. Many countries – UK, Germany, India, Brazil, South Africa – experienced rising infection rates, while other countries’ infection rates showed signs of stabilizing – even including the U.S. However, ballooning infection rates and a still-rising global death toll continued to weigh on investors

What happened: U.S. equities gained on the week driven by an unexpectedly strong labor report on Friday. However, general risk sentiment remained tepid as progress on further fiscal stimulus in the U.S. stalled and U.S.-China tensions continued to escalate. U.S.-China relations took center stage much of the week as the U.S. government sanctioned 11 Chinese and Hong Kong officials, unveiled executive orders banning dealings with Chinese companies WeChat and TikTok, and recommended that Chinese companies be delisted from U.S. exchanges should they not comply with U.S. accounting rules

  • - Equities across the developed world ended the week generally higher despite high-frequency data reports signaling that the economic recovery had lost some momentum. Even so, U.S. markets posted gains after a surprisingly strong jobs report on Friday, resulting in the S&P 500 rising 2.5% on the week
  • - Rates broadly rose across most developed markets. In the U.S., yields edged higher across the curve following better-than-expected jobs data and in anticipation of an upcoming Treasury auction. Rates also rose in the U.K. and Germany, while European peripheral spreads continued to tighten, particularly in Italy, where yields fell to their lowest levels since March
  • - Credit spreads rallied, with U.S. Investment Grade tightening 6 bps and U.S. High Yield tightening 9 bps over the week. Technicals remained supportive with strong fund flows, while supply accelerated with $33bn of IG issuance and $18bn of HY issuance during the week. Additionally, the Fed’s corporate bond buying program was extended to Dec ’20
  • - Emerging Markets sectors were mixed on the week with external debt up as spreads tightened, and local debt down, hurt by a stronger U.S. dollar. Argentina was a notable outperformer in external debt as markets reacted positively to news that a preliminary agreement to restructure the nation’s debt was potentially reached with the largest creditors
  • - Agency MBS spreads tightened during the week. The market continues to be supported by investor demand, particularly from banks as well as continued support from the Fed’s accommodative policies
  • - Muni yields rallied 4-10bps across the curve on the week on persistent fund inflows – Lipper reported $2.8bn of flows – and elevated levels of reinvestment capital. This was the 12th consecutive week of inflows into muni bond funds, pushing net year-to-date inflows to $6.0bn. There's an expected ~$39bn of bonds called or maturing in August, compared to just $14.5bn in visible supply, providing a significant tailwind to the market
  • - Oil prices (Brent crude) closed up 2.5% at $44.40/barrel to end the week. Improving manufacturing activity in the U.S., Europe and Asia combined with a greater-than-expected draw in U.S. crude inventories drove prices to their highest level since March 6th. Despite support in the market, prices modestly pulled back during the week on demand concerns amid still-depressed economic activity as coronavirus cases continued to rise
  • - Breakeven inflation rates in the U.S. moved higher, ending the week up 6bps to close at 1.62% -- their highest level since February. Upbeat economic data combined with the Treasury’s refunding announcement – which indicated unchanged TIPS issuance but increasing nominal issuance – supported inflation expectations alongside other risk assets

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