Inflows from low-yielding government bond markets into credit markets should have a positive impact on bond market performance, according to David Norris of TwentyFour Asset Management. The Fed's massive support has provided a strong foundation for the recovery in credit spreads.
As U.S. banks began reporting on Tuesday, JPMorgan Chase and Citigroup significantly outperformed market expectations, led by earnings from their investment banking divisions. Wells Fargo, meanwhile, was less strong, reporting its first quarterly loss since the financial crisis. "Interestingly, all three banks significantly increased their loan reserves due to uncertainty about the future course of the economy", says David Norris, head of US credit at TwentyFour Asset Management. But despite some recent positive macroeconomic data and significant, decisive action by the U.S. government, he said he is uncertain about the future course of the U.S. economy and the impact on corporate profits.
In its outlook for upcoming corporate earnings in the U.S. and the 3. In the third quarter, Norris locates seven near-term catalysts that could improve the outlook:
- Negotiations on the next financial assistance bill: Expectations are for a package of measures exceeding 1 trillion. U.S. dollars and could also include provisions to support an infrastructure bill.
- The figures for the 2. Quarterly rates could surprise on the upside: Given the consensus forecast that S&P 500 earnings will decline 44%, positive surprises would provide positive momentum for the market. TwentyFour Asset Management does not expect many companies to venture future forecasts. Room for positive surprises nonetheless, especially in those sectors that were not as badly affected by the lockdown and were able to resume business early on.
- With the low interest rate environment set to continue for the time being, investors will look to credit markets for additional yields. Since March, there have been 14 consecutive weeks of inflows into investment grade funds totaling more than $146 billion. US Dollar. High-yield added just over 55 billion in the same period. US dollar attracted.
- Some of this inflow is due to investors moving out of low-yielding government bond markets and into credit markets. While government bonds are considered "risk free" Designated, but most are not yielding either.
- Recent data has been encouraging, with June payrolls, May housing activity, consumer spending and retail sales all rebounding.
- TwentyFour Asset Management expects a decline in new issuance in the second half of the year. New issues in the investment grade segment have already reached the previous year's level since the beginning of the year; the high-yield segment is up 60% year-on-year. This indicates that many issuers have already built up protective cash buffers to counter the current economic slowdown. Experts believe it is highly unlikely that the number of new issues will reach this level in the remaining months of 2020, unless there is a second wave of contagion.
- He said the massive support from the Fed is not going to diminish anytime soon. Jerome Powell has committed the Fed to doing everything in its power to make the recovery as solid as possible. This had given investors the confidence to invest their capital in record amounts. The Fed has only scratched the surface in its recent Secondary Market Corporate Credit Facility programs, which has provided a basis for credit spreads to recover, Norris said.