Tumultuous first quarter culminates with a wave of buoyant optimism
- April 5, 2021
Corporates | Kennett Square, PA
After enduring Q1 volatility, including the GameStop frenzy and a severe spike in energy prices during the Texas freeze, the quarter wrapped up on a high note with the freeing of the Ever Given, the S&P 500 ending over 4,000, and blockbuster manufacturing PMI and March jobs reports.
With Covid-19 vaccine rollout reaching three million doses administered per day, the U.S. economy is gaining momentum as ~38% of adults have received at least one vaccine dose. Accelerated hiring in March added 916,000 jobs (which crushed the consensus expectation of +650,000) and resulted in the unemployment rate falling to 6.0%. The U.S. manufacturing activity in March also strongly beat expectations as the ISM Manufacturing PMI came in at 64.7 versus a forecast of 61.3, the index’s highest level since 1983.
This week, details of the proposed $2.3 trillion plan to upgrade infrastructure, create new jobs, and tackle climate change were revealed. The plan proposes to pay for the spending through an increase to the corporate tax rate from 21% to 28%.
The yields on benchmark 10-year treasury securities closed at 1.72% to end the week (after going as high as 1.765% earlier in the week during intraday trading) after the positive news on the economy and continued expectation of rising inflation. This continued the theme of long-term rates escalating throughout Q1 with the 10-year yields rising 81bps in the quarter and meaningfully steepening the yield curve.
For companies managing interest rate risk, analyzing capital structure, and seeking to minimize interest expense, the above market events re-enforced the importance of hedging strategy.
(Related insights: Read "Pre-issuance hedging in today's market," and register for the upcoming webinar, "Pre-issuance hedging: Practitioners share insights on why and how")
The U.S. dollar rebounded broadly in Q1, reversing the weakening trend it experienced in the second half of 2020. The U.S. Dollar Index (DXY) is up nearly 4% since the start of the year driven by strong economic recovery expectations and rising treasury yields. The Euro fell ~2% in March against the dollar, while CNY heads for its worst month against the dollar in over 1.5 years.
The Turkish Lira rapidly depreciated by 10% against the U.S. dollar in March, following news of removal of the governor of its central bank and his deputy by the Turkish president. This rapid movement of the exchange rate highlighted the need to manage currency risk carefully in these dynamic times.
(Related insight: Read "Operational FX hedging programs and the one leading practice you can’t afford to ignore")
Some welcome news on Thursday emerged when the OPEC+ oil alliance announced its decision to increase output gradually from May and release more barrels to the market to keep crude prices from rising further.
Q1 also brought a strong rally in grain prices, which jumpstarted the farm economy across the U.S. Midwest and lifted the prices to buy and rent farmlands aided by government stimulus and low interest rates.
As we start Q2 riding the optimism, some market trends to focus on are higher treasury yields, rising consumer demand, along with supply side constraints stoking inflation and a resurgent U.S. dollar with potential to weigh on corporate profits.
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.21-0096
Our featured insights
Recent economic data fuels hope for recovery
Despite uncertainty caused by rising COVID cases and the possibility of new global variants, strong March nonfarm payroll numbers and continued vaccine progress have increased investor confidence, raising hopes there is light at the end of the tunnel.
The top 5 benefits of ChathamDirect’s approach to support and client success
ChathamDirect’s unique approach to client support enhances the solutions our clients depend on and ensures you enjoy consistently satisfying experiences whenever you engage with us.
A tale of two economies and bitcoin
In a week marked by the impeachment trial and stimulus talk, a few trends emerged among the large public companies reporting earnings, and Tesla’s foray into bitcoin will create more challenges for companies in managing forecast risk.
5 treasury trends to watch in 2021
To succeed in the 2021 marketplace, corporate treasurers must rethink their financial risk management objectives, strategies, and policies while addressing their team’s changing role within the organization. Recognizing these five trends can help treasurers prepare for success in the year ahead.
Treasuries, crypto, and oil bring us into 2021
The Georgia Senate election results were finalized during a tumultuous week, along with the official certification of Joe Biden as the next U.S. President.
Stock market gains mask weak economic end to 2020
While nations worldwide continue to distribute the COVID-19 vaccine, Americans have seen some progress in receiving their stimulus checks. The Treasury Department began depositing $600 checks in to Americans’ bank accounts last week, causing equity markets to rise.
Are all things merry and bright?
With less than 10 days to go before year-end, lawmakers reached a final agreement on a new coronavirus relief package expected to be around $900 billion. Market expectations are high that Congress can pass it into law this week, providing needed relief for businesses, communities, and households.
Vaccinations, stimulus talks, and Brexit lead the headlines in the final weeks of 2020
Positive vaccine news has the equities market poised for another rally as futures are pointing up heading into this week. The 10-year Treasury and 5-year swap rate are floating around 0.90% and 0.42%, respectively as the markets open this Monday.