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The week in review – US financial markets
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Economic and political backdrop

Optimism about the gradual reopening of the global economy seemed to be the primary driver of sentiment last week. As restrictions on public gatherings continued to be lifted and retail establishments and restaurants received permission to serve customers in limited numbers, the daily number of new confirmed coronavirus cases rose moderately in some states but perhaps not as much as feared. Investors also seemed encouraged by news of human trials of a possible vaccine for COVID-19 under development by a US biotech firm.

The week’s economic reports also appeared to be less bleak than many had anticipated. April durable goods orders outside of the volatile transportation segment fell 7.4%, roughly half as much as expected. Another 2.1 million Americans filed for unemployment benefits over the previous week, which was slightly above expectations, but investors seemed reassured that the number continued to trend downward. Continuing claims for unemployment benefits also fell unexpectedly by roughly 4 million. Housing data were mixed. Sales of new homes rose at a robust pace in April, but pending home sales fell by nearly 22%, more than anticipated.

China’s passage of legislation restricting the autonomy of Hong Kong resulted in sharp criticism from US officials and appeared to drain some of the positive sentiment, particularly late in the week. Shares of social media corporations also came under pressure after President Trump threatened to tighten regulations on social media platforms following a posting of a fact-check notice regarding one of his tweets. On Thursday, the president signed an executive order accusing the platforms of engaging in “selective censorship” and calling on the Federal Communications Commission to investigate whether they were operating in “good faith.”

Equity markets

The S&P 500 was up 3.0% (-4.7% YTD), recording a second consecutive week of solid positive returns (markets were closed on Monday in observance of Memorial Day). Slower-growing value stocks again gained ground against more highly valued growth shares – the Russell 1000 Value returned 4.4% (-15.4% YTD) and the Russell 1000 Growth 2.2% (5.5% YTD) – while small-capitalisation stocks were on par with large-capitalisation stocks – the Russell 2000 returned 2.9% (-15.7% YTD).

At its peak on Thursday, the S&P 500 moved within 10% of its all-time high, pulling it out of correction territory, according to some definitions. Meanwhile, the technology-heavy Nasdaq Composite climbed within almost 3% of its February peak before falling back. Utilities stocks outperformed, while energy stocks moved lower on reports of an increase in domestic crude inventories. The price of a barrel of Brent ended the week little changed at USD 35.3.

However, year to date energy, financials and other value-oriented stocks remained far behind their growth counterparts in the wake of the pandemic. Vaccine hopes fostered strong gains in the shares of cruise lines and other travel-related stocks in the consumer discretionary sector. Communication services shares recorded a solid rise as did energy stocks with the price of a barrel of Brent ending the week at US$35.1, up from US$32.5 a week earlier. Healthcare stocks lagged.

Fixed income markets

US longer-term bond yields ended the week slightly lower as US-China tensions counterbalanced optimism about economies reopening. US 10-year Treasury yield ended the week at 0.65%.

The investment-grade corporate bond market saw steady primary market activity throughout the week, and the volume of deals exceeded expectations. New issues were generally met with solid demand, and credit spreads narrowed across most market segments.

Another week of strong inflows to high yield funds contributed to positive sentiment and helped the market absorb a heavy slate of new deals. Fallen angels – issuers that have recently lost investment-grade status – continued to perform well amid strong interest. In credit-specific news, one of the largest global car rental companies filed for Chapter 11 bankruptcy protection late the previous Friday due to travel restrictions causing a collapse in demand for its vehicles. The Chapter 11 filing allows it to continue operations as it works to pay creditors and turn its business around.

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