Wednesday Update - September 16, 2020

3 things to know

  • - U.S. equity markets (S&P 500) fell to start September after surging over 60% since the March trough, though the index remained up 6.7% YTD. A pull-back in mega-cap technology companies, spurred by concerns of overcrowding, contributed to the correction
  • - New coronavirus cases made headlines in various European countries even as the pace decelerated in the U.S. Growth in virus cases persisted globally, though developments continued on potential vaccines and therapeutics, bolstering investor sentiment broadly. Meanwhile, the ECB left policy unchanged and re-affirmed its accommodative stance
  • - No U.S. fiscal stimulus was issued despite widespread expectations for more support. The U.S. Congress remained divided on the details even as some deceleration in growth momentum was evident and the window for passage continued to shrink in the lead-up to U.S. elections

What happened: Regions continued to deal with COVID-19 as many countries in Western Europe begin to experience a “second wave” of infections. Meanwhile, the ECB left policy unchanged but warned of the negative economic effect of a continued surge in the EUR-USD exchange rate, particularly on eurozone inflation. In the U.S., the unemployment rate fell as labor market data continued to improve, though sentiment was tempered by the failure to pass another coronavirus relief package

  • - Equities across developed markets finished the first half of the month mixed as progress in therapeutics and vaccines bolstered sentiment despite mixed economic data that fueled fears of a decelerating recovery. U.S. markets experienced a correction amid concerns of over-concentration in mega-cap technology names, with the S&P 500 posting two consecutive weeks of losses to start the month
  • - Rates broadly fell and curves flattened across most developed markets. In the U.S., the 10 year yield fell 3 bps to 0.68% as rates generally remained range-bound despite modest flattening across the curve. In the U.K., the 10 year Gilt yield fell 9 bps to 0.22% following a resurgence in COVID-19 cases domestically, while the 10 year German Bund yield fell 8 bps to -0.48% in the wake of increasingly dovish ECB rhetoric. Following a similar pattern, rates also fell in Japan, Canada, and Australia
  • - Credit spreads widened modestly September MTD. The recent surge in issuance –$25bn MTD as of Sept 8 – has been accompanied by increased tender activity. Fed purchases of corporate bonds dropped to the lowest weekly purchase pace since the program began, with only $34mm for the week ended Sept 8. Further, the pace of downgrades slowed substantially, with $3bn/week IG bonds downgraded over the past month
  • - Agency MBS spreads widened MTD due to heavy origination supply. However, the Fed continues to support the market through steady purchases, which have recently surpassed $1 trillion dollars since the start of the recent quantitative easing measures
  • - Emerging Market sectors continued their recovery so far in September with both local and external debt rising modestly, the latter due to chiefly tighter spreads and the former due to declining yields. We continue to expect a bumpy recovery, with shocks from the coronavirus pandemic likely to have long-lasting, albeit varied, effects on the outlook for markets and economies
  • - Municipal yield curves steepened over the past two weeks, with short rates falling 1-3bps and longer rates rising 2-3bps. Some of this move can be attributed to the continuation of a fiscal stalemate, along with uncertainty as the U.S. election approaches. Recent trends have also posed headwinds, as lower corporate tax rates have made tax-exempt munis less attractive to banks and insurers, while increased primary issuance is likely to persist in the coming months as issuers look to take advantage of low rates. This should provide investors opportunities to put money to work
  • - Oil prices (Brent crude) declined by 10.5% to close at $40.53/bbl. Prices declined to their lowest level since June as the recovery in fuel demand stalled amid rising coronavirus cases across the globe. In a sign of concerns over demand, Saudi Arabia cut prices more than expected for October crude exports to major exporting regions of the world. Planned supply increases by OPEC also weighed on markets as the organization proceeds with scheduled tapering of previous production cuts
  • - Breakeven inflation rates in the U.S. pared gains from August to close at 1.67%. A pullback in energy prices and reversal in risk sentiment drove inflation expectations lower on growing signs of a slowdown in the economic recovery. While core CPI was better than expected at 0.4% m/m and rose to 1.7% y/y, underlying details were more disappointing than the overall figure suggested

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