Are all things merry and bright?
- December 21, 2020
Treasury Advisory and Technology
Corporates | Denver, CO
With less than 10 days to go before year-end, lawmakers reached a final agreement on a new coronavirus relief package expected to be around $900 billion. Market expectations are high that Congress can pass it into law this week, providing needed relief for businesses, communities, and households.
The holiday classic, “A Christmas Story” brought to us the infamous leg lamp and the Red BB guns but, most importantly, it also taught us a valuable lesson to never be triple dog dared into pursuing untested scenarios with unusual confidence, such as licking a frozen pole. Yet as Covid-19 cases remain high and economic data underwhelms, investors continue to be lured into equities leading the S&P 500 and Nasdaq to reach all-time highs.
Malls and stores have been busy decking the halls ahead of the holiday season, yet most shoppers chose to stay away amidst renewed lockdowns. November U.S. retail numbers showed a seasonally adjusted drop of 1.1%, marking the end of several months of growth in retail spending. Jack Frost also kept nipping at the economic nose as initial jobless claims for the week ending December 12 came in much higher at 885,000 compared to market expectations of 808,000. With less than 10 days to go before year-end, lawmakers reached a final agreement late Sunday on a new coronavirus relief package expected to be around $900 billion. Market expectations are high that Santa can now work his magic and help Congress pass it into law this week, providing much needed relief for businesses, communities, and households.
Federal Reserve guiding the sleigh
The Grinch, in the form of another government shutdown, also keeps looming large as a reminder of all the frailties that surround us. but then one foggy and gloomy eve, Santa came to say, “Fed with your heft so might, won’t you guide the sleigh tonight?” And the Fed surely has responded well to that call. Reiterating in its December FOMC meeting its commitment to keep rates low, it also provided clarity on its plans for asset purchases, which have already doubled the Fed’s balance sheet since the pandemic hit. Chairman Powell announced that the Fed will continue increasing its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until the economic recovery is complete. While such policy certainty is reassuring, the 10-year treasury yield has shown higher volatility in the last few weeks, vacillating between optimism surrounding the introduction of vaccines and a sluggish economic recovery, prompting many corporates to revisit their capital structure decisions for 2021.
(Related insight: Read “Hedging future fixed-rate debt”)
A frosty reception for the U.S. dollar
Amidst low-rate guidance from the Fed and prevailing fiscal policy uncertainty, the U.S. dollar fell to its lowest in over two years against major currencies last week. As global economic centers keep opening up, the U.S. dollar’s safe haven status is showing up less and less on the holiday shopping list. The Euro traded as high as 1.22, its highest since April 2018, while the Swiss, labelled a currency manipulator last week by the U.S. Treasury, saw the Swiss franc reaching its highest in six years to 0.88. But such gains weren’t only limited to European currencies as we saw strong appreciation in the Chinese yuan and Australian dollar, both of which hit multi-year highs, barraging corporate treasury teams who have had to deal with sizeable dollar moves in both directions in 2020.
(Related insight: Read "Market volatility impacts FX markets")
It is rightfully called the season of hope. All eyes will now be on Congress to ensure a government shutdown is averted and a much-needed stimulus bill is signed into law, closing out one of the most tumultuous years we’ve all seen.
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Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.20-0478
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