Monday Newsletter 8.17.2020

3 things to know

  • - U.S. President Trump signed executive orders aimed at continued economic relief after Congress failed to finalize an additional fiscal stimulus package. The signed actions aimed to extend unemployment benefits, defer student loan payments, cease evictions, and cut payroll taxes for Americans
  • - Economic data were mixed across the globe as retail sales climbed in the U.S., but at a slower pace than expected, and the number of unemployment claims fell below one million for the first time since the start of the pandemic. Meanwhile, Q2 GDP estimates for the UK and Japan showed annualized rates of contraction of 20.4% and 26.6%, respectively – though there were signs of improvement in the later weeks of the quarter
  • - European coronavirus cases continued to rise, stoking fears about a second wave of the virus. Germany and France each experienced their largest daily uptick in positive cases since lifting quarantine restrictions, while Spain continued to have one of the highest overall infection rate in the Eurozone. The UK also reported a rise in cases for the first time in nearly two months and added France, as well as additional countries, to its quarantine list

What happened: U.S. equities approached an all-time high on Friday, despite continued lack of progress towards additional fiscal stimulus, a depreciating dollar, and new U.K. travel restrictions alongside virus cases ticking higher in Europe. U.S. retail sales climbed for a third month but at a slower pace, contributing to dollar weakness for an eighth consecutive week, the longest streak since June 2010. In Europe, fears grew of a potential second wave of coronavirus cases that could spur lockdowns again

  • - Equities across developed markets finished generally higher on the week despite bleak import and employment reports in Europe and mixed economic data in the US. Slowing US retail sales weighed on markets, but weekly jobless claims fell below 1 million for the first time since March, helping the S&P 500 post a modest gain for the week
  • - Rates broadly rose and curves steepened across most developed markets. In the U.S., yields rose meaningfully following the week’s Treasury auction and better-than-expected jobless claims – in particular, the 10 year yield rose nearly 15 bps to 0.71% and the 30 year yield rose 21 bps to 1.45%. Rates also rose in the U.K., Japan, and Germany
  • - Credit spreads were relatively unchanged, with U.S. IG tightening 2 bps over the week. Ultra-low borrowing costs resulted in elevated US IG issuance of nearly $50 billion, with expectations for further issuance partially on the back of tender activity. Earnings were mixed, with ex-energy ex-financial Q2 EBITDA only trending 2% lower y/y. Current trading levels – coupled with Federal Reserve purchases near zero –suggest credit market conditions have largely returned to pre-pandemic levels
  • - Agency MBS spreads widened on the week, though the sector continued to be supported by elevated bank demand and steady Federal Reserve purchases. This past Wednesday, the GSEs increased the LLPA (Loan Level Pricing Adjustment) by 50 bps for “refinance loans only.” This means that mortgage borrowers will be paying roughly 12.5bps more to refinance their mortgage, which should ultimately be a positive for the mortgage market
  • - EM sectors were bifurcated by currency with external debt slightly negative on the week, as higher underlying U.S. Treasury yields outweighed tighter spreads, while local debt was up slightly – benefiting from a weaker U.S. dollar. Belarus was a notable underperformer in external debt as markets reacted negatively to the post-election violence and the possibility of E.U. sanctions in response
  • - Muni yields jumped 5-9bps across the curve on the week, as record low yields and US rate weakness pressured the highest quality munis. Lipper reported the 13th consecutive week of muni fund inflows ($2.3bn), with year-to-date inflows increasing to $11.4bn. Primary issuance is expected to rise well above historical averages in the week ahead as issuers look to capitalize on the current yield environment, providing opportunities for investors to put money to work
  • - Oil prices (Brent crude) ended the week relatively unchanged, closing at $44.80. Prices climbed to their highest level in five months amid continued signs of declining crude inventories in the U.S. along with improving demand. However, the IEA downgraded its outlook for global oil demand in 2020 by 140,000 b/d to 8.1mb/d -- underscoring the fragility of the economic recovery – and oil prices pared gains
  • - Breakeven inflation rates in the U.S. continued to move higher, ending the week up 4bps to close at 1.66%. Inflation expectations were supported by the strongest increase in core CPI since January 1991 (+0.6% m/m), led by an uptick in prices across travel and leisure categories

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