Weekly Market Recap
Credit markets not bothered
08/03/2021
Week in review
- Australia 4Q20 GDP rose by 3.1% q/q
- RBA held policy steady at its March meeting
- Australia retail sales up 0.5% m/m for January
Week ahead
- Australia business confidence index
- U.S. CPI inflation for February
- Australia consumer confidence index
Thought of the week
The rise and fall of bond yields continues to reverberate through the equity market as investors try to make sense of where inflation is heading. However, the same isn’t true for credit markets as spreads have been largely unaffected in recent weeks. Importantly, equity valuations are driven by sentiment, and sharp moves in credit spreads have accompanied significant drops in equity valuations (see chart). Does this mean that credit markets are mispricing the risk? If the reflation story holds, an orderly rise in yields would lead to further narrowing of already tight spreads. The positive economic outlook and improving earnings outlook would further support the outlook for credit. However, if the reverse is true, that the rise in yields becomes disorderly and central bankers can’t control the runaway inflation narrative, then bond yields are likely to gap higher and credit spreads widen. With credit spreads near their lows, it suggests that attitudes towards risk remain healthy.
Equity valuations correct when spreads widen
S&P 500 valuations and corporate bond spreads (bps)
Source: Bloomberg Barclays, FactSet, Standard & Poor’s, J.P. Morgan Asset Management. Data reflect most recently available as of 04/03/21.
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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