Weekly Market Recap

Defaults to rise

31/08/2020

Week in review

Australia capital expenditure falls 5.9% q/q
U.S. Durable goods orders surge 11.2% m/m
German business sentiment moderates

Week ahead

Australia 2Q real GDP
U.S. labour market report
RBA official cash rate announcement

Thought of the week

Economic indicators continue to improve for the U.S. economy which is helping support the equity market. However, we do expect economic momentum to soften into year-end as the rebound from the depth of the economic crisis passes. In the interim, risks assets such as equities and high yield debt continue to perform well. For high yield markets there will be some delay between the current state of the economy and the peak in the default rate. As this week’s chart shows, there is approximately a four quarter lag between tighter loan standards and a the peak in the default rate, suggesting a rise in defaults in the coming quarters. Given the heavy stimulus measures taken by the U.S. government and the Federal Reserve, this default cycle may not be as severe as others or reflect the size of the drop in U.S. economic activity. Defaults are not all bad as the process theoretically frees up resources for use elsewhere in the economy.

More defaults to come

Source: Federal Reserve Board, FactSet, J.P. Morgan Asset Management, all returns in local currency unless otherwise stated.
Equity price levels and returns: Levels are prices and returns represent total returns for stated period.
Bond yields and returns: Yields are yield to maturity for government bonds and yield to worst for corporate bonds. All returns represent total returns. AusBond Comp is the AusBond Composite 0+ Yr, AusBond IG is the AusBond Credit 0+ Yr both provided by Bloomberg.
Currencies: All cross rates are against the Australian dollar. An appreciation of the foreign currency against the Australian dollar would be positive and a depreciation of the foreign currency against the Australian dollar would be negative.

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