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- Global risk assets continued to rally in May given continued central bank support and the hope that economic activity would resume as COVID-19 lockdowns are slowly phased out to varying degrees
- Neither US unemployment, which remains at its highest level since the Great Depression despite slight improvements in May, nor widespread social unrest have had much impact on the market. This highlights the power of the Federal Reserve’s (Fed) plan and demonstrates that investors should not “fight the Fed”
- The EU Commission presented the Multi Financial Framework (MFF) for 2021-2027 and proposed a material increase of the EU budget and a recovery fund of EUR 750 bn, in addition to the EUR 540bn plan already approved last month
- In May, many emerging market central banks cut rates
Risk assets continued to rally in May given continued Federal Reserve support and the hope that economic activity would resume as COVID-19 lockdowns are slowly phased out to varying degrees. US high yield outperformed all segments of the US fixed income market with loans and investment grade corporates lagging, but also generating strong positive performance, and Treasuries generating a more modest positive return. Neither unemployment, which remains at its highest level since the Great Depression despite slight improvement in May, nor widespread social unrest have had much impact on the market. This highlights the power of the Federal Reserve’s (Fed) plan and demonstrates that investors should not “fight the Fed”. Flows have generally followed the Fed with both investment grade corporates and high yield seeing strong inflows. High yield experienced record new issuance while investment grade posted its second highest new issuance month Year to Date COVID-19 sensitive companies have been able to access the new issue market as long as they have been able to provide collateral. Companies are providing little forward guidance, and while the market will likely not care about Q2 numbers, we believe investors are looking ahead to 2021 and the companies that will survive because they have sufficient liquidity.
European fixed income returns were mixed for the month. High yield markets generated strong positive performance due to generous carry and supportive equity markets, while investment grade markets returned a modest positive total return due to a higher risk-free yield rise and a heavy new issue pipeline. German government bonds generated a negative total return for the month. As economic activity continued to be affected by the global pandemic, May saw many countries starting to re-open their economies. Economic forecasts for 2020 have been revised downward lately, however we believe April is likely to have been the lowest point of overall activity. The EU Commission presented the Multi Financial Framework (MFF) for 2021-2027 and proposed a material increase of the EU budget (up to 1.1 Trn EUR for the next eight years) and a recovery fund of EUR 750 bn, in addition to the EUR 540bn plan already approved last month. This proposal is built on a mix of grants and loans that would favour peripheral countries. As a result, Germany’s Bund yield rose over the period while peripheral spreads have tightened. In addition, expectations have been building in anticipation of an expansion of the ECB’s Pandemic Emergency Purchase Programme (PEPP) which would help to absorb the sovereign debt supply in the coming quarters. Looking forward, we expect that bond prices will be supported by both a decline in new issue volume and by growing ECB demand.
Emerging Market (EM) fixed income returns were strongly positive for the month, continuing to benefit from coordinated central bank efforts to loosen monetary policy to help reverse some of the losses sustained during the global pandemic. In May, many central banks cut rates, including Brazil, Mexico, Colombia, South Africa, Turkey, Romania, Korea, India, and Thailand. Additionally, South Africa and India benefitted from large government support packages and Argentina extended its debt offer deadline to June 12th. Turkey secured a substantial increase in its USD swap-line with Qatar. Uncertainty remains, however, as tensions have increased between China and the US regarding Hong Kong and as various countries are bracing themselves for the pandemic’s second wave. As lockdowns across the regions are relaxed, we believe it will be critical to understand consumer spending patterns, (with the knowledge that the faster the normalization, the quicker the working capital crisis might be alleviated).