The rise of volatility, rates, and COVID-19 cases
Treasury Advisory and Technology
Corporates | Denver, CO
SummaryAs the weather cools and we move into the last week of election fervor, an interesting dichotomy emerges. While initial jobless claims and unemployment seem headed in a positive direction, new COVID cases are near all-time highs foretelling a return to interest rate and currency market volatility.
Amidst the political jostling in the final stretch of the elections, hopes of another stimulus deal are still alive, though warranting heavy resuscitation at times. Over the week, equity markets reflected a downbeat sentiment regarding the timing of when such a deal would be signed, although positive earnings and employment reports from sectors of the economy helped buoy some of those concerns. Weekly initial jobless claims dropped to 787,000 against expectations of 875,000. Continuing claims came in far better than expectations, dropping from 10 million to 8.4 million, the lowest level since March when the economy first started shutting down due to the pandemic.
Hopes of a stimulus deal also spilled into the rates market as the 10-year treasury yield, considered a bellwether for economic activity, rose for seven consecutive days reaching its highest level since June 2020 to 0.86%. Much of this rise in longer term treasury yields hasn’t been as impactful to the shorter end of the curve, which is still affording floating rate hedgers an opportunity to lock in rates near record lows.
While most currencies showed subdued movements this past week, two currencies dominated the headlines. Anticipation of a trade deal between the UK and the Eurozone caused the British pound to climb to a six-week high after reports of a resumption in trade talks surfaced, with a goal of reaching a deal by mid-November. Across the globe, the Chinese yuan climbed to its highest against the greenback in over two years. This recent appreciation in the yuan is set against the backdrop of the yuan reaching its lowest in over 10 years against the USD back in early summer. Such rapid bilateral moves of the Chinese currency led to a sharp rise in one-year implied volatility, climbing to 5% compared to an average of 2% historically. The rise in volatility along with the uncertain trade environment now presents an incredible challenge for companies. Many that have historically left CNY unhedged due to low volatility levels are reassessing hedging strategies in the context of their global exposure profile to minimize the impact to company financials.
(Related insight: Watch the on-demand webinar, “Conducting a Holistic Diagnosis of Your FX Hedging Program.")
The week ahead will determine how much of the political rhetoric steals the thunder from a stimulus deal and whether the markets can remain optimistic amidst the continued onslaught of new COVID-19 cases. Next week will also be one of the busiest for earnings reports, including results from the biggest tech companies, and may well set the tone for the upcoming holiday season.
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.
Our featured insights
Markets price in latest Federal Reserve news as inflation, energy prices continue to rise
Global stock indices fell last week amid persisting inflation fears and subsequent expectations for more aggressive rate hikes. Domestically, fears that the Fed’s attempts to curb inflation will push the U.S. economy into a recession exacerbated investor concerns. Markets temporarily rebounded in...
No peak in sight as CPI hits fresh 40-year highs
A dark dose of reality greeted markets Friday morning as May CPI data topped expectations yet again. U.S. inflation reached its highest level since December 1981 as the consumer price index surpassed 8.6%. Investors and consumers alike are now looking squarely at the Federal Reserve and Chairman...
The Wall Street Journal asks Amol Dhargalkar why companies are keeping LIBOR debt on their books
The Wall Street Journal spoke to Amol Dhargalkar to understand why companies are keeping LIBOR debt on their books rather than replace it with SOFR when they refinance their loans.
Corporations are stuck between increasing interest rates, an appreciating dollar, and declining revenue
Unlike in typical expansions, a strong labor market and consumer spending are leading to market volatility and turmoil. Stuck between either rising interest rates or falling consumer demand, many companies are being forced to lower earnings estimates and make difficult decisions.
A hawkish Fed, volatile U.S. economy, and strong U.S. dollar
Across interest rate, equity, and commodity asset classes, the U.S. continued its rollercoaster of volatility. Despite this, the Fed attempted to soothe market participants with prospects of tightened monetary policy. Globally, the U.S. retained its position as the haven currency.
Amol Dhargalkar and Kevin Jones speak in Global Treasurer about corporate treasury's transition to SOFR
Despite some operational issues, global corporate treasurers have embraced SOFR and are working to transition their debt to the new benchmark. Speaking to Global Treasurer, Amol Dhargalkar and Kevin Jones discuss the progress of corporate borrowers making this transition.
Rates uncertainty continues as investors interpret consumer data
Interest rates continued their choppy trajectory last week as market data offered mixed narratives; retail sales data suggested continued strength in the U.S. consumer sector while manufacturing data portended future weakness in the economy. Meanwhile, dollar strength continues unabated.
Inflation continues to rise as crypto plunges
Inflation numbers are hot off the press and exceeding expectations as reports that the price of goods and services rose by 8.3% since last April. Although there is hope that we are falling from the peak numbers seen in March, consumer fears of a recession are growing and permeating the market —...