Even though there has been improvement in market sentiment in recent weeks, the pandemic continues to fuel concern
The ongoing risk created by the pandemic continues to heighten financial market stress, but it is not as unusual as you may think.
The latest TD Financial Stress Monitor concludes that, despite the speed of decline in risk assets, the depth of the stress around equities, credit, and funding markets has been “right around what we see in a typical recession.”
The report from TD economists James Orlando and Brett Saldarelli highlights that it took just 22 trading days for the S&P 500 to drop 30%, increasing the firm’s Volatility Index to its second-highest level ever, greater than during the 2008 financial crisis.
However, the stock market did not perform as badly as during the financial crisis thanks largely to stimulus from central banks and support from governments.
Volatility remains in North American equities amid growing COVID-19 infections, US-Canada trade tensions, and disagreement about US stimulus measures.
Corporate credit concern
The report points to the concern surrounding corporate credit markets as lower revenues cause concern about servicing debts.
This is most prevalent among the lowest grade credit borrowers where the spread to government bonds has doubled in recent weeks.
While the Fed has widened the range of corporate bonds that it will buy, TD’s economists “expect to see elevated spreads between lowest rated speculative grade issues and credit the Fed is buying.”