Monday Newsletter 8.24.2020

3 things to know

  • - Economic data were mixed across the globe as August PMIs in the U.S. and U.K. showed better momentum and outperformed those in Europe and Japan. The Eurozone August release indicated growth remained positive, but the speed of recovery had slowed with weakness concentrated in service sectors. The data releases broadly served as a reminder that the recovery would likely be uneven across the globe and its pace remained vulnerable to rising virus cases and potential renewals in lockdowns/travel restrictions
  • - Growth in U.S coronavirus cases was relatively steady while new cases in Europe rose last week. Increases in U.S daily coronavirus cases were more stable and below the average rise in the week prior. In contrast, European data showed evidence of a resurgence even as national leaders continued to oppose a return to lockdowns. Of note, U.S. hospitals will return to reporting new cases to the CDC in a reversal of policy after a shift to the Department of Health and Human Services led to delays and data problems. Global deaths passed 800,000 and cases rose above 23 million
  • - Upcoming U.S. elections were more of a focus as the Democratic National Conventionwas held last week and featured a wide-range of speakers across the political spectrum. The Republican National Convention is scheduled for the week ahead, with politics likely to be more of a focus in the lead-up to the elections in early November – potentially providing a source of volatility even as realized volatility has been lower recently across risk assets

What happened: U.S. equities reached an all-time high on Tuesday, fully recovering losses from the coronavirus selloff despite a jump in weekly jobless claims and an impasse on another coronavirus relief bill. Sentiment was tempered by minutes from the Fed’s July meeting, which underscored the continued risk that coronavirus posed to economic activity but also reaffirmed the Fed’s commitment to aggressive stimulus. Meanwhile, the US dollar index fell to its lowest level in over two years on Tuesday as demand for the safe-haven asset continued to fall

  • - Equities across the developed world ended mixed last week as Europe saw a resurgence in COVID cases and Eurozone flash PMI numbers disappointed while those in the U.S. surprised to the upside. The S&P 500 closed at a new all-time high on Friday, erasing its losses from the start of the pandemic and marking the fastest-ever return to a record high after a drop of more than 20%
  • - Rates broadly fell across most developed markets. In the U.S., the 10 year yield ended the week 8 bps lower as initial jobless claims rose back above 1m. Rates rallied in Germany while peripheral spreads widened modestly following an uptick in COVID-19 cases in Europe. Yields also fell across the curve in both the U.K. and Canada.
  • - Credit spreads widened modestly on the week with August issuance so far ahead of expectations, already $115bn MTD, driven by record low yields. Tender activity remains elevated as companies look to term out their debt with lower coupon, long-dated bonds. Further, an increase in longer-dated issuance is driving an extension in duration of the US IG credit index, now in excess of 8yrs
  • - Agency MBS were flat to 1 basis point wider on the week as limited market volatility and continued steady Fed purchases have been supportive of the asset class
  • - Emerging Market sectors (hard-currency and local) were flat to modestly negative on the week as spreads widened and currencies weakened versus the U.S. dollar. Russia was a notable underperformer in local debt as the poisoning of a key opposition figure, Alexei Navalny, raised fears that other nations may impose sanctions in response
  • - Municipal yields were unchanged in the shortest maturities and jumped 5-10bps in longer dated bonds last week, as a large slate of primary issuance pressured what had been record low yields. Lipper reported the 14th consecutive week of muni fund inflows ($1.8bn), with year-to-date inflows increasing to $13.2bn. Market technicals are expected to weaken heading into the fall months, providing opportunities for investors to put money to work
  • - Oil prices (Brent crude) declined modestly to $44.35 per barrel. Growing signs that the global economic recovery has stalled amid rising coronavirus cases – notably in Europe – overwhelmed constructive inventory data in the U.S. Against a backdrop of still-weak demand, OPEC+ reinforced the importance of compliance with agreed upon output targets
  • - Breakeven inflation rates in the U.S. were relatively unchanged and closed at 1.64%. Fed minutes – which failed to provide detail related to the Central Bank's inflation framework review – offset improving risk sentiment

For further information please email: