Weekly CEF Market Report - June 20, 2021
Weekly CEF Market Report - June 20, 2021
Macro Picture
The major equity indices had their worst week since early January- mostly on inflation concerns and a hawkish FOMC that signaled an increase in rates may come sooner than expected. The pain wasn't relegated to US stocks but also international markets- finishing lower as well. The only sectors to outpace the broad based S&P 500 were information technology and consumer discretionary. Large caps held up better than small caps.
The moves underlying in the markets show a falling rates/lower cyclical push. In other words, tech/growth stocks over value stocks, US stocks over international, health care/consumer staples over energy. This could be a momentary blip where the market gets some fear of higher inflation/rates.
The summary economic projections following the FOMC meeting showed they expect two hikes by the end of 2023. That is a faster pace of tightening than in prior projections. Powell reiterated that high inflation is likely to be transitory but stressed uncertainty about the inflation outlook.
On Friday, stocks took another leg lower after St. Louis Fed President James Bullard said that he expects the Fed’s first rate hike in late 2022, before the early 2023 beginning of the tightening cycle that market participants expected. Friday’s decline affected cyclical stocks the most, and the CBOE Volatility Index (VIX) hit its highest level since late May.
Rates ended the week significantly lower to 1.443% from the mid-1.5% after the meeting on Wednesday. Commodities crumbled on the rate moves with gold, copper, and silver all deep in the red this week. Oil remains the bright spot with WTI staying solidly above $70.
Next week, the following economic data is slated to be released:
Tuesday: May existing home sales
Wednesday: May building permits and new home sales, Q1 current account, June Markit PMI Composite
Thursday: Weekly initial and continuing claims, May wholesale inventories and durable orders, revised Q1 GDP
Friday: May personal income and personal consumption, June University of Michigan sentiment
Commentary
Discounts in taxable CEFs were largely flat on the week though NAVs were mostly lower. Preferreds and loans held up best on a NAV basis only losing 6 bps each. Muni CEF NAVs lost 0.3%, high yield NAVs lost 0.3% and mortgages were off 0.5%.
Equity CEFs lost about 1% on discounts and about 2% on NAVs. But muni CEFs saw tighter discounts on the week by about 0.4%. They are now about to break the pivotal -1% threshold and, again, I believe heading to a premium level.
The fear in higher rates drove the sector performance (outside of munis) with limited duration and senior loans doing best on price during the week. Munis were third with a small gain.
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