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.
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