Monday Musings: June 15, 2020

Jun 15, 2020

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Public Trust Credit Team
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Nervousness in the stock and bond markets

Last week, the Fed mentioned it would keep its benchmark interest rate near zero until at least 2022 to help the economy recover from the COVID-19 pandemic as well as continuing to increase its bond holdings to sustain financial markets and preserve the flow of credit. Unsurprisingly, the Fed’s comments quickly prompted bank stocks to tumble. Tension across the broader stock market was palpable in recent days as investors have been digesting economic news and worrying about the resurgence of COVID-19 cases, but as of today, the stock market was already rebounding. Some nervousness in the bond market was noticeable as well with moderate spread widening seen in the Barclays Corporate Agg index. Tension in the global financial markets will likely continue for a while as the resurgence of COVID-19 cases appear in different parts of the globe. This weekend, close to 80 new COVID-19 cases were recorded in Beijing, most of which were related to a vegetable and seafood wholesale market. New lockdowns could easily derail countries’ economic recoveries and that fear continues to keep investors on edge.

The initial wave of negative rating actions appears to be dissipating

Given the abrupt economic decline and global shutdown of major economies, the Nationally Recognized Statistical Rating Organizations (NRSRO) have dealt swift and rapid responses to companies that appeared to be at highest risk from the initial onset of the COVID-19. Interestingly, research by BofA Securities revealed that after the rating agencies fired off downgrades at an elevated pace in March and April in response to COVID-19, it appears the NRSROs have calmed down somewhat. In fact, BofA Securities research shows approximately $25 billion in net upgrades since mid-May. This follows a recent report by S&P Global Ratings regarding the U.S. Auto Industry, whereby the rating agency expects both the frequency and depth of the agency’s downgrades in 2020-2021 to be less severe than downgrades made in 2008-2009 for the industry. From a credit perspective, it appears the rating agencies may be providing a slight reprieve from the initial negative rating actions executed at the onset of the pandemic, but as economies reopen and the possibility of a second wave of the virus persists, it may be prudent to remain cautiously optimistic over the near term.

Country-wide protests spur tech giants to reconsider facial recognition

As large scale protests swept the nation in recent weeks, leading tech companies have begun to reconsider the use of their facial recognition programs. Amazon, IBM, and Microsoft have all rescinded their agreements with the Federal government and police departments regarding the use of their facial recognition software until Congress steps in to craft legislation addressing how the government and police departments are allowed to use the technology and what limitations should be in place. This was a surprisingly quick response, considering how often tech giants do not want to wade into public debate and the industry is already grappling with the use of censorship, free speech, and fact checking on their platforms. The move stoked the ire of the White House with President Trump threatening to stop Microsoft from getting Federal contracts. However, we view the threat as mostly empty since the government uses the companies for cloud operations, and they’re the only three providers with scale large enough for Federal systems at the time being.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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