Ignoring Christmas past and present, markets focus on Christmas future
- December 7, 2020
Client Relationship Management
Corporates | Kennett Square, PA
SummaryDespite the looming specter of COVID-19, investors shifted focus to 2021 and the hope that vaccines could bring herd immunity by mid-year. Beyond vaccine news, further state certification of U.S. election results and renewed hope for Congress passing a stimulus package fueled investor optimism.
This optimism trifecta put market participants across all asset classes in the risk-on driver’s seat. As a result, equities experienced record highs, interest rates increased, and the dollar slid lower in value relative to most of its peers.
The risk-on trend had investors selling bonds and buying equities, resulting in rates being elevated to near pandemic highs. In addition, the optimism for future growth widened the spread between near and long-term U.S. rates, resulting in a steeper yield curve.
Also, pertinent to the rates space, the administrator of LIBOR announced it will consult on extending the publication of certain U.S. dollar (USD) LIBOR tenors until June 30, 2023. This would allow USD LIBOR contracts that mature before June 30, 2023 to do so without disruption. The Fed also proposed that banks must cease entering into new LIBOR contracts (subject to some exceptions) by December 31, 2021. Nonetheless, they are urging that as markets develop, new contracts will need to be issued utilizing SOFR, which could increase the complexity of managing a rates portfolio benchmarked to multiple indices. That stated, many accounting, regulatory, and economic considerations will need to be made going into 2021.Related content: Check out this LIBOR transition readiness checklist for corporates which is a comprehensive checklist that covers operational, regulatory, and accounting considerations of the LIBOR transition
The week wrapped up with nonfarm payroll numbers of +245k falling well short of the +475k expected. The labor force participation rate also fell, indicating that even the positive decrease in the unemployment rate may not be a clear representation of economic recovery.
U.S. dollar weakness continued to dominate the currency headlines as the greenback fell against its peers to its lowest levels since April 2018. Specific currencies of note include the euro (EUR) scaling the 1.20 level on the back of economic recovery prospects, the British pound (GBP) nearing 1.35 on account of positive Brexit talks, and the Chinese Yuan (CNY) moving closer to 6.5 as the country continued to experience a strong economic recovery.
Dreams of life returning to “normal” in 2021 had analysts suggesting that fuel consumption will again increase. In addition, OPEC members struggled to agree on whether to keep production levels low, resulting in an upswing in oil with WTI futures surpassing $45. In the metals space, industrial metals (e.g. copper) benefited from the prospects of a recovery, while precious metals (e.g. gold) continued to dwindle in price due to the risk-on play by investors.
(Related insight: Read "Using commodity collars to manage market volatility")
Investors will be watching for any developments on the vaccine front, further insight into relief package negotiations, and trends in the world’s ability to contain and recover from the virus.
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.20-0462
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