A tale of two economies and bitcoin

It has been the best of times, yet also the worst of times as corporate earnings keep pouring in. With some tech company earnings exceeding $100 billion for the fourth quarter, the week also brought us the news of the largest investment in bitcoin by a mainstream corporation, another impeachment trial in the Senate, and a $1.9 trillion stimulus plan that is gaining steam.

Initial Trends in Corporate Earnings

With several large public companies already having reported earnings, a few trends seem to emerge from the disclosures - greater emphasis in pursuing liquidity through access to debt markets, heightened focus on the organization’s geographic footprint including supply chains, cost centers and revenue projections, and swifter acceleration of technology within most aspects of its business. All of this has brought treasury and finance functions within organizations into the limelight and sparked conversations ranging from pre-issuance of debt and capital structure evaluation, to foreign currency program evaluation and technology integration. And with the latest announcement by Tesla that it is investing $1.5 billion in bitcoin and that it would accept cryptocurrency as a form of payment, new challenges abound for treasury teams in managing forecast risk and responding to the wider acceptance of bitcoin as a form of payment. Yet hopes of another stimulus package remain strong under the new administration as the $1.9 trillion bill passed several committees within the House of Representatives. How companies respond against lower consumer spending, optimize their use of liquidity, and manage against market volatility will define the impacts of 2021.

(Related insight: Read “Pre-issuance hedging in today’s market”)

Interest Rates

Although the unemployment rate has fallen steadily from its high of 14.8% in 2020 to 6.3% in January amidst lower case counts for COVID-19, the number of new jobs added each month in the U.S. continues to weaken. In his speech to the Economic Club of New York, Fed Chairman Jerome Powell stressed the importance of a “patiently accommodative monetary policy that embraces the lessons of the past.” Despite rising short-term interest rates and inflation over the last few months, the Fed allayed any concerns that it would react by raising benchmark rates soon and projected that the Fed would keep the Fed Funds rate near zero and continue buying $120 billion of mortgage bonds and Treasury securities each month.

(Related insight: Read “Recent Fed activity and its impact on corporate hedging”)

Currencies

Bitcoin may be soaring above $50,000 and reaching record highs, but the resilience of the U.S. dollar remains strong. The U.S. dollar index, after having gone up over the last three weeks, gained some more against its peers as risk appetite ebbed. With Britain disclosing its sharpest downturn in 300 years, a GDP decline of 9.9% year-over-year, and the Euro Zone unable to distribute vaccines efficiently, the U.S. dollar gained against both the GBP and EUR as well as other liquid currencies such as the AUD, NZD, JPY and CAD.

Commodities

Brent crude hit a 52-week high of $62 per barrel, extending its longest rally in two years with lower supplies worldwide contributing to higher oil prices. With supply curb agreements in place by the OPEC+, there seems to be no respite unless one of the major producers resorts to higher production. For now, many corporates have recommenced operational programs or initiated new programs hedging steel, aluminum, metals, and fuel as most commodities witness their pre-pandemic price levels.

(Related insight: "Using commodity collars to manage market volatility")

Week Ahead

With more corporate earnings on deck, markets will closely watch company forecasts for 2021, along with the finer details of the third stimulus bill expected to be final by the end of the month. For now, vaccine distribution has also led to a sharp reversal in the number of cases, and companies will hope to see more relaxing of the restrictions to revive consumer spending.