Economic and political backdrop

US stocks jumped at the start of trading last Monday, with many attributing the strength to a front-page editorial in the China Securities Journal, stating that “fostering a healthy bull market after the pandemic is now more important to the economy than ever”. Growing hopes for a COVID-19 vaccine being released as early as the end of the year also seemed to support the gains, but few concrete developments appeared to drive the rally.

Stocks drifted lower over the next few sessions as optimism about progress in fighting the pandemic appeared to drain away. More states announced increases in newly diagnosed cases and hospitalisations, and several governors announced new restrictions or delays in reopening measures. By the end of the week, the US had crossed the threshold of 60,000 new cases reported in a single day, with over 3 million confirmed cases recorded since the start of the pandemic. On Friday, however, stocks seemed to get a lift after Gilead Sciences announced a new study showing that remdesivir, its COVID-19 treatment, might reduce mortality rates in severely ill patients by nearly two-thirds. Earlier studies had demonstrated only that remdesivir could shorten hospital stays.

Investors appeared to be particularly concerned that the impact of the resurgence in the virus seemed to be showing up in economic data. In an interview published Tuesday morning, Atlanta Federal Reserve Bank President Raphael Bostic told a reporter that high-frequency data “suggest that the trajectory of this recovery is going to be a bit bumpier than it might otherwise.” Later that day, his counterpart at the Cleveland Federal Reserve Bank, Loretta Mester, told CNBC that it was likely “to take quite a long time to get back to where activity and employment was pre-pandemic.” On Thursday, however, St. Louis Federal Reserve Bank President James Bullard struck a markedly different tone, telling CNBC that “I think we’re tracking very well right now” and predicting that the unemployment rate could fall as low as 7% by the end of the year.

The week’s major economic reports generally surprised on the upside but may have been dismissed by some investors as largely reflecting conditions before the recent resurgence in the virus. The Institute for Supply Management’s gauge of service sector activity rose more than expected in June and nearly matched its February level, before the recognised onset of the pandemic. Job openings in May also rose more than expected, while weekly initial and continuing jobless claims fell more than anticipated.

Equity markets

The S&P 500 recorded a gain of 1.8% (-0.1% YTD). The major indexes ended mixed for the week, with large-caps outperforming small-caps – Russell 2000 returned -0.6% (-13.9% YTD). The technology-heavy Nasdaq Composite fared best, reaching new record highs, thanks in part to strong gains for “work from home” shares. Growth stocks outperformed value shares – the Russell 1000 Growth returned 3.5% (16.0% YTD) while Russell 1000 Value 0.3% (-15.5% YTD). Social and streaming media stocks boosted the communication services sector, which outperformed within the S&P 500, while energy shares were weak as WTI crude oil prices fell back below USD 40 per barrel.

Fixed income markets

Longer-term Treasury yields decreased through most of the week on growing virus concerns and briefly slid to levels last seen in late April, aided by particularly strong demand in the Treasury Department’s 10-year note and 30-year bond auctions. The 10-year Treasury yield ended the week modestly lower at 0.65%.

The investment-grade corporate bond market saw light trading volumes and modest new issuance, but market sentiment received a boost after Bullard’s optimistic comments Thursday. It was also a quiet week in the high yield market. Buyers were more active than sellers as the asset class continued to experience positive flows, and demand outstripped supply due to modest new issuance.