Markets balance tension between optimism and looming uncertainty
- October 5, 2020
Corporates | Kennett Square, PA
SummaryMarking the first monthly decline since March, September saw a 3.9% contraction in the S&P 500 index, as equity investors faced labor market weakness, impasse on further fiscal stimulus, and the specter of a contested presidential election.
At the same time, a market rally of the last two weeks of the month signaled a tide of optimism on the same issues. These opposing forces have created a tension for market participants in an economy struggling its way through the pandemic, and with one month until the election the market will now assess the ongoing health situation at the White House following the president’s contraction of COVID-19.
The labor markets
Amid such uncertainty as the backdrop, the labor market continues to remain in focus. Despite consecutive months of job growth, the labor market is facing ongoing headwinds. Non-farm payrolls were disappointing Friday morning, with 661,000 jobs added during September versus initial estimates of 859,000, suggesting a potential slowdown in the pace of recovery. On the bright side, unemployment continued to fall, decreasing half a percentage point to 7.9%, but that could merely reflect a decline in the labor force participation rate. Only about half of the jobs erased during the onset of the pandemic have been recovered to date; moreover, layoffs from major corporations during the past week, including Disney, Shell, American Airlines, and Goldman Sachs, signaled a deepening impact of COVID-19 on the jobs sector across industries.
Personal income data
Personal income data released last week also portended economic challenges ahead; after increasing modestly in July, personal incomes were reported to contract by 2.7% during the month of August, reflecting not only job cuts but also the expiry of certain government stimulus packages that had been supporting particular industries and unemployment benefits.
Interest rate markets
As markets grapple with competing headlines, rates markets remain rangebound though still subject to persistent volatility on the longer end of the curve. Highlighting this volatility, the 10-year Treasury rate climbed to an intraday high of 0.71% on October 1 as fiscal stimulus talks appeared promising, only to fall back to a 0.66% - 0.67% range as bipartisan discussions deteriorated over the course of the day. As corporations continue to take advantage of low treasury yields to support debt issuance, many companies are considering pre-issuance hedging given the low rate environment and potential for the yield curve to steepen in future periods. For example, a company can hedge a future 10-year issuance two years forward by locking in a forward-starting swap rate of about 0.834%.
(Related insight: Read “Hedging future fixed rate debt”)
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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.20-0389
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