Concerns over the recent resurgence in COVID-19 cases in many parts of the world sent markets sharply lower Monday as volatility spiked. The S&P 500 fell more than 1.5%, and the VIX (volatility index) spiked from about 17 to 22. Nevertheless, there were plenty of investors willing to buy the dip and a big rally on Tuesday helped recoup virtually all of Monday’s losses. Earnings reports remain at center stage, with 79 of the S&P 500 companies set to release second-quarter earnings this week. Earnings season is proving to be extremely strong, with 80% of companies so far beating analyst expectations on earnings and 83% beating on revenue. The pandemic continues to escalate in Asia with South Korea and Thailand reporting record infections, and Tokyo seeing a surge in cases just as the Olympics gets underway. In the U.S., there are increasing concerns that the American capacity to identify and track new strains of the virus will not be able to keep pace with new COVID mutations. Remarkably, all 50 U.S. states have seen an increase in cases over the last two weeks.
On the policy front, the American Rescue Plan signed in March made parents eligible to receive advanced monthly payments for child tax credits with increased payments starting on July 15. The March stimulus bill set a maximum credit of $3,600 annually for children younger than age 6 and $3,000 for those between 6 and 17. The regular child tax credit had been $2,000 annually for children under the age of 17. In bonds, Treasury yields were lower in a flight-to-safety trade, with the 10-year Treasury trading as low at 1.15%, the lowest level since February. Credit markets saw elevated volatility as well, as the spread on the ICE BofA U.S. High Yield Index, a commonly used benchmark for the junk bond market, spiked from 318 basis points on Friday to 344 basis points as of Monday. It is the highest level since late March, according to Refinitiv data. It was also the biggest widening in a day since last June. For investment-grade debt, the impact was much more subtle as the ICE BofA U.S. Corporate Bond Index spread rose to 93 basis points, the highest level since mid-May.
Submitted by: Austin Schaul, Head of Research
Source: GSAM, CNBC, AGF, Factor Investor
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