Equities drop sharply off record highs
- September 8, 2020
Equity markets saw continued growth early in the week, with the Nasdaq and S&P 500 reaching all-time highs on September 2. However, Thursday saw a massive sell-off led by the tech industry, signaling that investors are growing wary of record stock valuations against weak macroeconomic fundamentals.
On Thursday, the Nasdaq finished down 4.96%, while the Dow Jones and S&P 500 finished down 2.78% and 3.51%, respectively. Despite the large downturn technology stocks saw on Thursday, the industry as a whole, especially the FAANMG stocks (Facebook, Amazon, Apple, Netflix, Microsoft, and Google (Alphabet)) have outperformed the market in 2020.
Rates suppressed following Fed methodology shift
Treasury yields erased some of their recent gains and fell throughout the week, with both the 10-year and 30-year treasury notes reaching their lowest levels since August 10. After the Fed’s recent announcement of targeting an average instead of a discrete inflation target, interest rates are expected to remain low for a longer period, prompting many of our corporate clients to explore extend-and-blend strategies to reduce the near-term cash impacts of swap liabilities and take advantage of a flat forward curve.
(Related insight: Read “Is an extend-and-blend strategy the right solution for your interest rate hedging program?”)
Labor market improves
There were 881,000 initial jobless claims for the week ending August 29, beating the expectation of 950,000 claims. Although this marks only the second time that initial jobless claims came in under one million since late March, this was the first week that the Department of Labor (DOL) accounted for seasonal effects in initial and continuing job claims, which was expected to lower the number of claims. Meanwhile, August nonfarm payroll numbers were released Friday, showing a gain of 1.4 million jobs, which slightly exceeded survey expectations of +1.35 million jobs.
Euro hits relative peak against dollar
The Euro (EUR) continued to strengthen against the U.S. dollar (USD) this past week, peaking just above 1.20 (intraday) on September 1. The Euro has not reached the 1.20 threshold since May 2018. However, the reduced yield differential between the two currencies (making USD investment less attractive), the EU stimulus package agreed upon in late July, and better control of COVID-19 compared to the United States have all contributed to the Euro strengthening. That said, EUR quickly came back down to more recently observed levels, ending the week at 1.1838. Separately, in the UK, a stall in Brexit negotiations led the Great Britian Pound (GBP) to weaken against the U.S. dollar somewhat, ending the week at 1.3275. Recent FX volatility could have a major impact on corporations’ foreign cash flows when compared to budget rates. A layering hedge strategy tends to reduce the impact of moving rates in a volatile market.
(Related insight: Register for the webinar, “Strategic Considerations for Cross-Currency Swaps” on September 10 at 2 p.m. ET)
(Related insight: Download Chatham’s Benchmark Study Report, "The State of Financial Risk Management," to see what peer corporations are doing to manage FX risk.)
Tempered expectations of data in the week ahead
While the stock market continues climbing and job numbers are marginally exceeding expectations, there is still a great deal of uncertainty surrounding a COVID-19 vaccine. Cases continue to trend upwards, and many colleges and universities are seeing major outbreaks. Many will be monitoring initial jobless claims for the week ending September 4 to compare against the previous week’s data under the new DOL method.
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Volatility is expected as the market reacts to initial jobless claims, consumer confidence numbers, and the Republican National Convention. While existing home sales beat expectations, jobless claims once again exceeded one million and the Fed pushed back the timing of its forward guidance targets.
A week that began with confidence that Congress would pass another round of fiscal stimulus provided a catalyst for investors to move from safe havens, like bonds and precious metals, into equities.
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Ensuring an effective, compliant hedging program means assessing both visible and hidden costs across all hedging activities, including strategy and pricing, legal and regulatory, and accounting.