Markets lurch higher on tight presidential election
- November 9, 2020
Client Relationship Management
Corporates | Kennett Square, PA
SummaryAs Tuesday’s election left both parties anxiously awaiting final vote counts, the American public had to wait almost four days after polls closed to learn that Joe Biden was projected to be the 46th President of the United States.
Further adding to the week’s ambiguity, Senate control also remains up in the air as of this writing, hinging on two runoffs in Georgia scheduled for the first week of January 2021. Against this backdrop, we learned that election uncertainty is one flavor of risk that equity markets are happy to embrace, as stocks saw their largest post-election rally in history. After a disappointing stretch leading up to the election, equities locked in their best week of gains since April, and volatility ensued across other markets.
An “everything” rally
Following a steady increase in treasury yields throughout October, 10-year yields whipsawed the day of and after the election, reaching an intraday peak of 93 basis points Tuesday evening only to plummet to 72 basis points Thursday morning. This sharp drop in treasury yields was unusual in its correlation with the rally we saw in equities; typically, the two asset classes move in opposite directions as investors shift capital from one to the other.
With the election dominating headlines, the Federal Reserve press conference held on Thursday came and went with little fanfare despite Chairman Powell’s warning that the economic outlook remains highly uncertain as COVID cases rise. Powell reiterated calls for more economic stimulus and the Fed’s commitment to supporting economic growth at current levels. Combined with better-than-expected October employment data, the yield curve was on a roller coaster of immediate flattening following the election, only to steepen modestly at the end of the week. The combination of lower overall rates and compressed spreads on the week is presenting companies looking to reduce their interest rate exposure with an opportunity to increase or extend their fixed-rate profile.
(Related insight: Read the article “Hedging future fixed-rate debt”)
Dollar weakness dominates
Amidst the prospects of a scaled-down COVID relief package due to the possibility of a divided government, the U.S. dollar (USD) index saw a weekly decline of 1.9%, its largest in four months. The broad dollar move was acutely prevalent when compared to the Mexican peso (MXN), which strengthened to levels not seen since the beginning of the pandemic and closed the week at 20.55. While the MXN strength was largely brought on by the prospects of a Biden victory and friendlier trade terms, it is worth nothing that the overall volatility did not approach the levels seen immediately following the 2016 election. On the other side of the world, the Chinese yuan (CNY) whipsawed around on rapidly shifting potential election outcomes, only to end the week having strengthened to 6.59, a high not seen against the dollar since July 2018. As the election results continue to solidify, a growing number of investors are expecting dollar weakness to continue until there is further clarity.
(Related insight: Read the article “Managing foreign currency risk: Why some companies hedge more than others")
With Biden projected to win the presidential election, all eyes will shift to focus on the prospects of a divided government and subsequent impacts to the currency, commodity, and interest rate markets. On the economic data front, inflation levels (both CPI and PPI) and Consumer Sentiment are scheduled for release later in the week.
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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.
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