Following the big gains in US equities last week, the S&P 500 Index opened above the 3000 level for the first time since early March. Asian and European markets fared better as well, with Japan a standout. Moreover, WTI crude prices are higher after a solid four-week showing. Meanwhile markets remain supported by signs of recovery as more of the US economy reopens
Fed buys $1.5 billion in bond ETFs.
The Federal Reserve’s (Fed) purchases of bond ETFs accelerated in the week ending May 20, raising the total to $1.8 billion. The purchases have helped keep corporate credit markets orderly and have helped narrow corporate credit spreads, while representing only a small fraction of the Fed’s $11 billion in bond purchases for the week.
Concentrated earnings decline.
With 480 companies having reported results, first quarter S&P 500 Index earnings are tracking to a 14.6% year-over-year decline. Consumer discretionary and financial companies have driven all but one percentage point of the overall decline. Consensus estimates for the next 12 months’ earnings have been cut by 20% since March 31, as nearly 40% of S&P 500 companies have withdrawn guidance amid heightened uncertainty around the economic recovery (sources: FactSet, JPMorgan Chase). Only 11 S&P 500 companies will report results this week.
Corporate credit spread narrow.
The average credit spread for investment-grade corporate bonds broke below 2% last week for the first time since early March, ending the week at 1.86%. That is well below the recent March 23 peak of 3.73% and is slowly closing in on the 15-year median of 1.36%, with the help of Fed purchases. We are neutral overall on investment-grade corporates, with income attractive and valuations still better than neutral, but with some concerns about vulnerability to potential downside-risk scenarios.