Economic and political backdrop

Wall Street began last week on a negative note, with worries about the resurgence of the coronavirus across much of the US seemingly weighing on sentiment. Renewed shutdowns in California appeared to be a particular focus of worry, with indoor dining at restaurants prohibited and the Los Angeles and San Diego school districts announcing a return to online classes in the fall. The resurgence also seemed to be showing up in high-frequency economic data, such as restaurant reservations and travel indicators.

Good news on the vaccine front at midweek appeared to ease resurgence concerns, helping stock markets move higher. After the close of trading Tuesday, Moderna Therapeutics announced its novel messenger RNA vaccine had produced high levels of antibodies in all test participants in an initial safety trial, although some experienced side effects. On Wednesday, Oxford University researchers announced that their vaccine candidate, which is under development with AstraZeneca, had produced not only antibodies in participants, but also “killer” T-cells that may offer prolonged immunity.

Both vaccine candidates are receiving support from the US government’s “Operation Warp Speed” programme, and advance steps in manufacturing mean vaccines may be available in limited quantities as early as the fall if further test results are positive. On Wednesday, Dr. Anthony Fauci, the nation’s top infectious disease official, said he believed the US would meet its goal of having a vaccine by year-end.

Tensions with China seemed to remain a modest drag on sentiment. President Trump did not announce any new measures against China at a press conference Tuesday, as some had feared, but White House officials stepped up their criticism of both its government and US companies that do business in the country. On Thursday, Attorney General William Barr was particularly pointed, accusing Disney, Apple and other US firms of “kowtowing” to the ruling Chinese Communist Party.

The week’s economic data were mixed. Manufacturing data were generally positive, with two regional gauges of factory activity indicating healthy expansion and coming in above expectations. June retail sales also beat expectations, but the University of Michigan’s preliminary gauge of July consumer sentiment fell back from June levels, which its chief researcher attributed to growing coronavirus worries. Weekly jobless claims surprised on the downside, falling only slightly from the previous week. Continuing claims fell more than expected, however.

Equity markets

In the US, the major indexes ended the week mixed. The S&P 500 recorded a gain of 1.3% (1.2% YTD), marking its third consecutive week of gains and reaching intraday levels not seen since the market sell-off began in late February. The index ended the week in positive territory for the year on total return basis. A shift out of higher-valuation growth shares into value stocks – the Russell 1000 Growth returned -0.8% (15.0% YTD) while Russell 1000 Value 3.4% (-12.6% YTD) – caused the technology-heavy Nasdaq Composite to pull back from its all-time highs, however. The market rotation was also evident in the outperformance of smaller-cap stocks, which have lagged considerably in recent months – Russell 2000 returned 3.6% (-10.8% YTD). Within the S&P 500, industrials shares outperformed by a wide margin, while technology stocks lost ground.

The week marked the unofficial start of the earnings season, with 32 of the S&P 500 companies scheduled to report second-quarter results, according to Refinitiv. Several major banks reported steep drops in profits as they set aside billions of US dollars in anticipation of writing down bad loans, but investors seemed encouraged in some cases by gains in underwriting and trading revenues. Analysts polled by FactSet currently expect overall profits for the S&P 500 to have contracted 44% in the quarter relative to a year before – if confirmed, it would be the worst performance since the 69% earnings drop amid the financial crisis in the final quarter of 2008.

Fixed income markets

Treasury yields decreased slightly through most of the week – 10-year Treasury yield ended the week at 0.63% – due, in part, to inflation readings that remained well below the Federal Reserve’s 2.0% annual target. Although a spike in gasoline prices in June contributed to a 0.6% increase in the headline CPI for the month – the biggest jump in nearly eight years – the core CPI reading, which excludes food and energy prices, was only 1.2% for the 12-month period.

The investment-grade corporate bond market saw light trading volumes amid fairly balanced buying and selling activity. Positive flows and modest new issuance due to earnings blackout periods provided technical support for the asset class, while the volume of new deals was well below early estimates. Light issuance, along with equity gains and continued flows into the asset class, supported the high yield market. Buyers were generally more active than sellers, although our traders noted that the summer lull in overall trading volumes appears to have set in.