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Market Update

Equities volatility amid recovery fears, stalled stimulus

Date:
October 19, 2020
  • sabra hess headshot

    Authors

    Sabra Hess

    Director
    Client Relationship Management

    Corporates | Kennett Square, PA

Summary

Renewed lockdowns in many regions sent equities downward for most of last week as concerns of a brutal second wave of COVID-19 rose.

These developments, coupled with stalled U.S. stimulus talks, mixed corporate earnings, and a seven-week high for jobless claims left market participants anxious that the recovery will be slower and harder than earlier anticipated.

Kristalina Georgieva, CEO of the International Monetary Fund, echoed this sentiment, underscoring that the recovery will be uneven. Particularly, advanced economies with the ability to issue debt at reasonable costs will continue to fare better than economies with high levels of debt and less access to markets. To highlight the difference, for advanced economies the IMF sees a 5.8% economic contraction this year, while a country like India is facing a 10% contraction, relative to emerging markets with stronger fundamentals. Strong emphasis remained on continued government stimulus policies and encouraging private investors to participate in debt relief initiatives for the world’s poorest countries.

Closer to home in the U.S. corporates sector, momentum has started shifting towards broader adoption of SOFR use in hedging transactions. Across sectors, corporates have been the slowest adopters in the global shift from LIBOR to alternative reference rates; while SOFR has been used by banks and GSAs, it has not been incorporated as a feature of the corporate funding process to date. Unilever and JP Morgan’s recent 10 year, $500mm SOFR linked fair-value swap (hedging a September 2030 bond) is a bellwether signal that the market transition to SOFR is now underway.

The structure of this transaction also highlights that with the record number of fixed debt issuances this year, more companies might be seeking to manage their fixed-floating ratio to target levels. Pairing a fixed-to-floating interest rate transaction with a long-term debt issuance is a strategy that can be attractive when the yield curve steepens and is one of several strategies that can be used to take advantage of a widening gap between short and long-term interest rates.

Finally, in a sure signal that there is no turning back, this past weekend saw $80 trillion in swap transaction notional transition to SOFR for determining their value. The “big bang” in the U.S. follows a similar change enacted in Europe in July.
(Related insights: Read "SOFR forward curve update and the CCP “Big Bang'" and "LIBOR: Update on industry initiatives and proposed legislation”)

In the week ahead we will watch for developments in the heated Brexit negotiations, as well as similarly intense discussions on a second U.S. stimulus package. The American people will learn whether House Speaker Nancy Pelosi's "Tuesday or bust" ulltimatum to the white house produces a stimulus package and, as earnings season pushes onward, more high-profile earnings releases are expected.

About the author

  • Sabra Hess

    Director
    Client Relationship Management

    Corporates | Kennett Square, PA


Disclaimers

Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.

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.

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