Economic and political backdrop
The rapid increase in confirmed new coronavirus cases, particularly across the South and in California, weighed heavily on sentiment throughout last week. While trends remained positive in the New York region and other areas that had been hard hit earlier in the pandemic, the national total of daily new confirmed infections reached a record high on Wednesday. Although some of the rise appeared due to increased testing, hospitalisations also increased. On Wednesday, Houston officials reported that over 97% of the city’s intensive care unit beds were occupied.
Whether the resurgence would lead to renewed wholesale lockdowns appeared unclear, but it already showed signs of having a modest economic impact. The scheduled 17 July reopening of Disneyland in California was pushed back on Wednesday, while employees at Florida’s Disney World petitioned for a similar delay. On Thursday, Texas’s governor announced a pause in the easing of further lockdown rules in the state, and then both Florida and Texas ordered the partial closure of bars on Friday. Apple also announced temporary store closures in the two states.
The political backdrop seemed largely supportive through much of the week and may have helped cushion the declines in stock markets. On Monday, President Trump told a reporter that another “very generous” stimulus bill would be coming, and White House Economic Advisor Larry Kudlow later told Fox News that the plan might include another round of direct payments to individuals. The president also tweeted early in the week that the trade deal with China was “fully intact.” On Friday afternoon, however, stocks fell back after The Wall Street Journal reported that Chinese officials had quietly warned US Secretary of State Mike Pompeo that “meddling” in the affairs of Hong Kong and Taiwan could put the phase one trade deal at risk.
The week’s economic data may have also helped shore up sentiment. IHS Markit’s Purchasing Managers’ Index (PMI) gauges of both current service and manufacturing sector activity surprised modestly on the upside, and May durable goods orders, reported by the Commerce Department, beat expectations by a wider margin. Existing home sales in May fell short of estimates, but new home sales came in well above consensus. Labour market data were similarly mixed. Weekly jobless claims declined by less than expected, but continuing claims fell more than anticipated, moving below 20 million for the first time since late April.
The S&P 500 recorded a loss of 2.9% (-5.7% YTD). Stocks gave back the previous week’s gains, as worries over a resurgence in the virus offset enthusiasm over some positive economic data. Growth stocks handily outperformed value shares – the Russell 1000 Value returned -4.2% (-18.5% YTD) while the Russell 1000 Growth -1.9% (6.9% YTD) – and the technology-heavy Nasdaq Composite fared best relative to other benchmarks. small capitalisation stocks marginally outperformed, with the Russell 2000 returning -2.8% (-16.6% YTD). The declines pushed the S&P 500 back into correction territory (down more than 10% from its February peak), according to a broadly used definition.
The overall market swung between gains and losses for much of the week, but bank stocks were particularly volatile. On Thursday, financials rallied on news the Federal Reserve was easing restrictions put in place following the financial crisis of 2008–2009, including allowing certain types of riskier investments and lowering some margin requirements. Financials fell back sharply Friday morning, however, on the previous evening’s news that the Fed was planning to restrict banks’ ability to pay out profits to shareholders through dividends and share repurchases.
Fixed income markets
Coronavirus fears appeared to push the US 10-year Treasury yield down to 0.64%, its lowest level since mid-May.
Virus headlines weighed on the investment-grade corporate sector, and credit spreads drifted wider with riskier market segments underperforming. Volume of trades was lighter overall, and new issuance for the week was at the low end of expectations.
Meanwhile, virus fears caused several industry segments, including energy and airlines, to trade lower and underperform the broad high yield market. A decline in crude oil prices – the price of a barrel of Brent ended the week at USD 41.0, down from 42.2 a week ago – contributed to the weakness. Even energy sector fallen angels – companies that have recently lost investment-grade status – came under pressure after a period of strong interest. Positive flows to the asset class continued, however, with high yield funds not reporting an outflow since late March.
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