Markets on a seesaw
- October 13, 2020
Client Relationship Management
Corporates | Kennett Square, PA
Last week was dominated by headlines and tweets regarding the progress and potential for Congress to pass an additional fiscal stimulus package. Sentiments swinging between optimism and pessimism throughout the week had a dramatic impact on rates, currencies, and commodities.
Interest rates saw significant movements on the back of risk-on/risk-off activities by investors last week. In the beginning of the week, talks between Treasury Secretary Mnuchin and Speaker of the House Pelosi sparked hopes that a deal was imminent, sending the 10-year U.S. Treasury yield to 0.783%, its highest level since early June. That optimism was swept away in a single tweet on Tuesday when President Trump urged representatives to halt negotiations until after the election. The market immediately reacted, sending equities down and interest rates six basis points lower. Rates recovered quickly after the President fired off another tweet asking Congress to promptly send him separate bills that offer $138 billon of relief for small businesses and $25 billion for the airline industry. These gyrations culminated in rates hitting a four-month high, as swap rates rose eight basis points 10-years out on the curve and 10 basis points on the 30-year.
Currencies also received their dose of volatility as fiscal stimulus headlines drove investors from the dollar to riskier currencies, then see-sawed the other way, only to finally shift back again to riskier currencies. Meanwhile, weakness in economic data and increased COVID cases in the EU and the UK weighed on the euro and pound sterling, which closed on Friday at 1.176 and 1.293 respectively.
Related insight: FX volatility is likely here to stay for a while. It has never been more important to understand your FX profile. Join our webinar on Wednesday, October 14 as we explore the process of "Conducting a Holistic Diagnosis of your FX Hedging Program."
Commodities were mixed this week as precious metals followed their inverse correlation to the dollar. Dollar strength resulted in metals losing their luster, only to regain some of their shine when the dollar reversed course. Industrial commodities and energy saw some increases in optimism for a relief package, with investors hoping there will be more consumption after U.S. households receive checks in the mail. WTI hit a two-week high, breaking $41/barrel on Thursday.
The U.S. election news, COVID-19 coverage, tweets, and stimulus package hopes have the propensity to bring more volatility to the markets. Headlines related to polls and how different outcomes could impact the economy will be major considerations for investors. The trend has been that any indications of a Democrat sweep will likely bring steeper yield curves as new program spending will mean increased borrowing demand.
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.20-0399
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