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Economic and political backdrop

Stocks had a poor start to last week, as concerns over the worsening of the pandemic in several states as well as a new outbreak in Beijing seemed to continue weighing on sentiment. The market then rebounded late Monday following the Federal Reserve’s announcement that it will begin buying a broad portfolio of US corporate bonds. The purchases will be made by the Fed’s Secondary Market Corporate Credit Facility, an emergency lending programme that to date has purchased only ETFs.

On Tuesday and Wednesday, Fed Chair Jerome Powell testified before Congress, urging that recent monetary stimulus be paired with more fiscal support. While no clear plans have yet to emerge, reports of a USD 1 trillion infrastructure plan being prepared at the White House seemed to further support sentiment. Markets early in the week also seemed to get a lift from a major study showing a common steroid drug, dexamethasone, helped save lives in serious COVID-19 cases, marking the first treatment to have a demonstrable impact on reducing the fatality rate.

The week’s economic data offered mixed signals as to whether the economy will be able to manage a “V shaped” recovery. On Tuesday, the Commerce Department reported a 17.7% surge in retail sales in May, better than double consensus expectations and the biggest gain in history – albeit one measured against the 23.3% cumulative decline over the previous three months. Labour market data disappointed, however. Weekly jobless claims fell less than expected, and continuing claims remained elevated, at over 20.5 million. A gauge of current manufacturing activity in the mid-Atlantic region surprised dramatically on the upside, indicating considerable expansion instead of continued contraction, but overall industrial production in May rose less than expected.

Equity markets

The S&P 500 recorded a gain of 1.9% (-2.9% YTD), erasing part of the previous week’s steep declines. The technology-heavy Nasdaq Composite fared best and briefly moved close to the all-time intraday high it established on 10 June. Energy stocks led the rebound, helped by signs that major oil-exporting nations were adhering to previously agreed production cuts as well as optimism for increased global demand. The price of a barrel of Brent ended the week at USD 42.2, up from USD 38.7. Healthcare and materials stocks also outperformed, while airline stocks were especially strong early in the week, boosted by reports of a resurgence in air travel. The small real estate and utilities sectors lagged.

Value stocks underperformed growth stocks – the Russell 1000 Value returned 0.5% (-14.9% YTD) and the Russell 1000 Growth 3.1% (8.9% YTD) – while small capitalisation stocks outperformed, with the Russell 2000 returning 2.3% (-14.2% YTD).

The week ended on a volatile note due in part to Friday’s “quadruple witching” – the simultaneous expiration of four types of options or futures contracts, occurring once each quarter. The rebalancing of the S&P 500 and several other benchmarks was also likely to result in elevated volumes and price movements.

Fixed income markets

Reflecting the conflicting economic signals, US 10-year Treasury yield ended the week roughly unchanged at 0.70%.

Investment-grade corporate bond credit spreads moved tighter after the Fed announced that it will begin buying individual corporate bonds to supplement its purchases of ETFs. However, spreads moved wider as the week progressed amid increased selling to fund purchases in the primary market. The volume of new deals was well above expectations.

News of the Fed’s expanded bond-buying programme was supportive for the performance of high yield bonds. This was particularly true of issues from “fallen angels” – companies that have recently lost an investment-grade rating. While the robust retail sales numbers also fostered positive sentiment towards risk assets, the high yield market struggled somewhat to absorb a large volume of new deals.