COVID-19 cases and restrictions weigh on economic data
Client Relationship Management
Corporates | Kennett Square, PA
SummaryThe market’s focus last week continued to laser in on all things coronavirus related. While investors applauded positive vaccine news out of Moderna and Pfizer early in the week, the continued surge in cases and increasing levels of restrictions weighed down on economic data as the week progressed.
It was a grim week as U.S. fatalities topped 250,000, with many states counting record-high infection rates. Weekly unemployment claims continued to trend higher as well, although other data released showed a better than expected rate of housing starts in October, suggesting the housing market continues to be buttressed by historically low mortgage rates.
Falling treasury yields
Ten-year treasury yields also fell after less than stellar retail sales data. They continued to hover around 10 basis points lower than the highs of a week earlier when Pfizer initially announced positive vaccine trial news. Similar struggles with COVID-19 related impacts overseas also appeared to jeopardize the prospects of a near-term recovery, and the IMF said in a statement on Thursday, “There are signs that the recovery may be losing momentum.” However, on a longer time horizon, the positive information coming from vaccine manufacturers seems to have investors looking ahead with a little more hope for a brighter future; approximately $4 billion USD has left U.S government bonds recently and about 10x that amount has made its way into global equity funds.
(Related insight: Read “How to use blend and extend interest rate swaps to optimize your hedging program”)
Abroad, post-Brexit negotiations planned for Thursday were partially put on hold when the EU President tested positive for COVID-19. Both sides seek an agreement to govern their trading relationship once the post-Brexit transition ends. Areas of contention continue to be fishing rights, competition rules and enforcement.
On the FX front, the U.S. dollar (USD) seemed caught between two opposing forces as tighter economic restrictions and potential further monetary easing competed with vaccine optimism. However, when looking more broadly at the global pandemic’s impact on the dollar, the USD has weakened meaningfully against several currencies since March 31st.
With the ongoing uncertainty in dollar strength, many USD functional corporates continue to fine tune their FX hedging programs to ensure the maximum levels of flexibility can be employed while still mitigating the desired levels of economic risk.
(Related insight: Read “How to increase FX hedging capacity while maintaining hedge accounting”)
The week ahead
This week many U.S. market participants and corporates will look forward to a shortened week, while consumer spending and new home sales stats are set to be released on Wednesday, prior to the start of the holiday.
Wishing all our readers a very happy Thanksgiving!
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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.20-0452
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