Weekly Market Recap
Credit markets not bothered
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
- 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)
JPMorgan Global Research Enhanced Index Equity Fund
To achieve a long-term return in excess of the benchmark by investing primarily in a portfolio of companies, globally; the risk characteristics of the portfolio of securities held by the Sub-Fund will resemble the risk characteristics of the portfolio of securities held in the benchmark.