Monday Newsletter 10.05.2020

3 things to know

  • - U.S. equity markets (S&P 500) experienced their first monthly decline since March – although remained up 5.6% YTD – as rising Covid infections, declining expectations of further fiscal stimulus, and electoral jitters weighed on sentiment. Tech-focused indices in particular retreated meaningfully from summer highs
  • - New coronavirus cases made headlines in various European countries while the pace decelerated in the U.S. In the U.K., Prime Minister Boris Johnson tightened restrictions by supporting work-from-home suggestions and ordering a curfew for restaurants and bars. While growth in virus cases persisted globally, developments continued on potential vaccines and therapeutics
  • - U.S. political discord remained center stage, highlighted by disagreements over a Supreme Court nomination and rhetoric surrounding the first presidential debate.Despite the lapse of some Federal benefits in August, the possibility and timing of additional U.S. fiscal stimulus remained unclear even with widespread expectations for more support and many voicing potentially dire consequences in the absence of it

What happened: Flash PMIs in the U.S. and Europe showed positive momentum in manufacturing activity, but also strain in the services sector as the rising number of coronavirus infections weighed on consumer sentiment. The S&P 500 experienced its first monthly decline since March following weeks of volatility amid concerns over further shutdowns and the uncertainty surrounding another stimulus package. Brent crude was also heavily impacted, falling nearly 10% in September. Federal Reserve Chair Powell indicated that the central bank will continue to support the economy for as long as it takes

  • - Equities in developed markets broadly sold off after a five-month rally. The MSCI World Index slumped 3.45% as coronavirus cases climbed in Europe, and U.S. equities fell 3.80% from record highs as a lack of fiscal stimulus and uncertainty surrounding the U.S. election overshadowed dovish Federal Reserve sentiment and encouraging economic figures. Beneath the surface, mega-cap technology companies led the sell-off amid a rotation from growth into value
  • - Rates broadly fell in September as risk appetites declined. In the U.S., rates remained range-bound – the 10 year yield fell 2 bps to 0.68% – as the Fed outlined its expectation to keep its policy rate anchored near the zero bound through 2023. In the U.K. and Germany, curves flattened and 10 year Gilt and Bund yields fell 8 bps and 13 bps to 0.23% and -0.52%, respectively, following an uptick in COVID cases in Europe. In Japan, the 10 year yield fell 4 bps to 0.02%
  • - Credit spreads widened modestly in September amid overall market weakness. Demand for IG credit remained strong, driven by mutual fund flows and overseas investors, as the market absorbed a heavy primary calendar ($162bn in issuance) relatively well. Fed purchases have remained relatively low, averaging $72mm per week in September, with total corporate purchases now at $12.91bn across ETFs and bonds
  • - Agency MBS spreads widened on the month. Although the pure beta of the sector underperformed, coupon performance was differentiated across the stack with current coupon outperforming higher coupons and specified pools outperforming TBAs. 15 year MBS outperformed 30 year MBS while Ginnies underperformed Fannies as buyouts weighed on investor sentiment. In September, the Fed purchased $40bn (net) of Agency MBS, bringing total purchases this year to $1.1tn. Gross issuance remained elevated at $295bn for the month, marking one of the top 5 largest months of gross issuance with issuance now surpassing $2tn over the last 12 months. In August, prepayment speeds were flat
  • - Emerging Markets turned weaker, driven by global factors rather than country-specific factors, including a generally more defensive stance by investors. This was realized through a modest rise in yields and currency weakness in local debt, alongside wider spreads on external debt
  • - Municipal yields ended the month 3bps lower in the 2-year segment, unchanged in the 5-year segment, and jumped 6bps in the longer maturities on the curve. Much of this yield move came in the first half of the month, while the second half was characterized by a relatively steady market. Elevated primary supply, especially on the taxable front, continues to pressure yields. On the demand front, fund inflows have continued – $42bn allocated over 19 consecutive weeks – but have tapered in recent weeks, especially within the high yield muni universe
  • - Oil prices (Brent crude) declined over the month and closed at $40.95/bbl. Prices fell to their lowest level since June on stalling fuel demand amid rising coronavirus cases across the globe. Oil prices ended the third quarter at roughly the same level it started, with a loss of momentum in economic data suggesting a slow and uneven recovery. Underscoring the fragile backdrop, the IEA again downgraded its forecast for global oil demand in 2020, now projecting levels to be 8.4 million barrels per day below those in 2019
  • - Breakeven inflation rates in the U.S. pared August’s gains to close at 1.63%, though strengthened over the quarter. Weakening energy prices and elevated economic uncertainty drove inflation expectations lower on growing signs of a slowdown in the recovery. While U.S. core CPI printed better than expected at 0.4% m/m and rose to 1.7% y/y, underlying detail was more disappointing

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