The week in review – US financial markets

Economic and political backdrop

Following the lack of progress in stimulus negotiations over the previous weekend, the prospects of passing a relief package before the election seemed to dim further last week. On Tuesday, Republican Senate Majority Leader Mitch McConnell stated he was only prepared to bring a USD 500 billion package to a vote – far below the USD 2.2 trillion that House Democrats were demanding. McConnell’s offer was also well below the USD 1.8 trillion the White House was proposing, and President Trump immediately criticised the Senate package as too meagre. On Wednesday, however, Treasury Secretary Steven Mnuchin remarked he and House Speaker Nancy Pelosi remained far apart on some issues.

Coronavirus worries also seemed to dampen sentiment during much of the week. Investors appeared concerned by the continued rise in cases in the US and Europe, and Wednesday brought news of pauses in trials of both Johnson & Johnson’s vaccine and Eli Lilly’s antibody treatment due to possible adverse reactions. The US also recorded its first confirmed case of reinfection with the virus. On Friday, however, markets appeared to get a lift from news that Pfizer was preparing to seek emergency use authorisation (EUA) from the Food and Drug Administration (FDA) for its vaccine as soon as November.

The week’s economic data were mixed. Core retail sales – excluding purchases at auto dealerships, gas stations, home centres and food services suppliers – rose 1.4% in September, easily reversing a downwardly revised 0.3% drop in August. The University of Michigan’s preliminary gauge of October consumer sentiment also surprised moderately on the upside. However, weekly jobless claims disappointed, rising to 898,000, a two-month high. Continuing claims again offered a more hopeful picture, however, falling from a revised 11.2 million to 10.1 million. Core (less food and energy) consumer prices rose 0.2% in September, but much of the increase was again due to higher prices for used cars and trucks as consumers sought to avoid public transportation.

Equity markets

In the US, the S&P 500 narrowly managed a third consecutive week of gains, finishing the week 0.2% higher (9.8% YTD). Small-cap shares lagged slightly after a recent streak of outperformance, while growth outperformed value. Russell 1000 Growth returned 0.5% (29.5% YTD), Russell 1000 Value -0.1% (-7.5% YTD) and Russell 2000 -0.2% (-0.8% YTD).

Within the S&P 500, industrials and utilities shares outperformed, while financials recorded losses as investors gave a lukewarm reception to bank earnings reports. The small real estate sector was also weak. The S&P 500 reached its high point for the week on Monday afternoon, guided higher by mega-cap technology stocks. Apple shares recorded solid gains ahead of the company’s unveiling of new iPhones on Tuesday and Amazon shares were also strong in advance of its annual Prime Day, scheduled this year to stretch over 13 and 14 October.

The week marked the unofficial start of earnings season, with 31 S&P 500 companies expected to report third-quarter results, according to Refinitiv. Analysts polled by FactSet and Refinitiv currently expect overall third-quarter earnings for the S&P 500 to fall over 20% on a YoY basis.

Fixed income markets

US 10-year Treasury yield declined to 0.75% from 0.78%. Treasury yields initially rose after the retail sales report but decreased through most of the week, driven in part by the Federal Reserve’s purchases of US government debt, concerns surrounding vaccine trials and softness in key components of the latest consumer price index data.

Core eurozone bond yields fell. A rally in German debt pushed yields on these haven securities to the lowest level since the market swoon in March. German 10-year bund yield was trading at -0.62% on Friday, down from -0.53% a week ago. In the UK, 10-year gilt yield ended the week 10 basis points lower at 0.18%, down from 0.28% at the end of the previous week.

Rising COVID-19 cases in Europe and concerns surrounding fiscal stimulus negotiations in the US continued to weigh on sentiment in the investment-grade corporate bond market. Primary issuance levels contracted throughout the week and finished well below expectations. Trading volumes were somewhat light in the high yield market, as macroeconomic concerns appeared to keep many investors on the side-lines. In issuer-specific news, AMC Entertainment was reportedly weighing its options, including a potential Chapter 11 bankruptcy protection filing, amid increasing liquidity needs as moviegoers have not returned to theatres and studios have delayed movie release dates.


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