Ready for some fun and not-so-fun games? Stock mischief, strain variations, and doves flying with the Fed

Investors picked up their joysticks last week and played games with all the major asset classes. The biggest game of the week was played by a group of amateur investors who purchased large blocks of targeted stocks. That action took those selected stocks to unthinkable price levels, forcing hedge funds to cover their naked shorts. We also learned about some not-so-fun high scores related to new variants of COVID-19 that popped up in South Africa and the United Kingdom and that COVID-19 cases eclipsed 100 million globally. And finally, the Fed suited up for their January FOMC meeting and Fed Chair Press Conference. This time around, their statement changes contained a dovish tone suggesting asset purchasing and low rates are likely going to continue. The events above caused ripples in equity markets, creating a weeklong seesaw for stock prices. The biggest winners of the week were tech stocks as they continued to outperform based on success realized during the pandemic.

Interest Rates

Rates, while still near post-pandemic highs, erased some of the early January gains as the 10-year U.S. Treasury fell more than 5 basis points on Monday. As the week progressed, rates remained range-bound despite the Fed’s dovish tone on Wednesday but were propped up by investors’ flock to equities later in the week. It was a mixed bag in terms of economic data; the initial reading for 2020 Q4 GDP came in at 4.0%, lower than an expected 4.2%, while U.S. initial jobless claims posted slightly better than anticipated. With 10-year yields continuing to float around the 1.00% level, we are seeing an increase in corporates contemplating and executing Treasury locks or forward-starting swaps to hedge their future fixed-rate issuances.

Foreign currency

The U.S. dollar (USD) continued to play the role of underdog and banks are suggesting that could be the trend for years to come based off their projections. Against the USD, The British pound (GBP) traded at a two-and-a-half-year high of 1.373, while the Euro (EUR) was down from its early January peak (which was north of 1.23), trading at 1.212.

(Related insight: Watch the on-demand webinar, “An Altered Currency Landscape and Impact to Corporate Hedging Programs")

Commodities

Last week, fluctuations in oil prices remained muted. WTI traded between $52 and $54 per barrel. Steel and aluminum continued to remain strong on the back of Chinese demand and are currently more than double the price compared to their 12-month lows.

Looking ahead

In the coming week, all will be watching to see how the drama in equities continues to unfold. On the economic data front, we will see a variety of indicators, including manufacturing PMI, factory orders, and durable goods. Make sure to register for our “Semiannual Market Update for Corporations” webinar on Wednesday, February 3 at 2PM EST.