Vaccine news makes headlines, and the Fed issues its Financial Stability Report
- November 16, 2020
Corporates | Denver, CO
The S&P 500 reached a historic high after news of a potential COVID-19 vaccine. However, those gains were erased as new infections surged. Fed Chairman Jerome Powell said that despite a potential vaccine, the U.S. economy will likely need additional support from Congress.
The biggest headline last week came early Monday morning when Pfizer announced a vaccine candidate was found to be more than 90% effective in preventing COVID-19 in participants who had no prior evidence of the infection. The S&P 500 reached a historic high after news of the potential vaccine. However, those gains were erased in the subsequent days as new infections throughout the country surged. The U.S. continues to break national records, surpassing 150,000 daily cases of COVID-19 as well as exceeding 60,000 hospitalizations. The recent uptick in both categories has caused local and state municipalities to contemplate or re-introduce lockdown and social distancing measures. In a virtual meeting with the European Central Bank on Thursday, Jerome Powell, Chairman of the Federal Reserve, expressed that despite the potentiality of a vaccine by the end of the year, the U.S. economy will likely need additional support from Congress.
Along with last Monday’s announcement of the potential vaccination, the Board of Governors of the Federal Reserve System issued their Financial Stability Report as of November 2020. The purpose of this report is to review conditions and near-term risks that the Board believes will affect the stability of the financial system. Since its previous report in May 2020, the Board noted that asset prices continue to increase, while household and business earnings have fallen, leaving both more susceptible to future shocks. Regarding near term risks, the board highlighted the obvious vulnerabilities related to the continued spread of COVID-19 and of particular note, the November report was the first time the board has acknowledged financial risks associated with climate change.
(Related insight: Read “Recent Fed activity and its impact on corporate hedging.”)
Market impacts on interest rates included an increase to the ten-year U.S. Treasury, and a resulting steepening of the yield curve. The 10y UST touched .98% on Thursday, its highest level since March. The continued volatility has many corporates evaluating long-term financing levels in the context of both recent spikes as well as relative lows compared to pre-pandemic levels.
(Related insight: Read “Hedging future fixed-rate debt”)
In a LIBOR Transition Update included in the Financial Stability Report, the Board referenced a recent survey of financial institutions conducted by Moody’s that indicated most firms believed they were on track for the LIBOR cessation, despite some setbacks caused by the pandemic. Additionally, the Board highlighted two important milestones along the transition. First, the two main clearing houses began to discount cleared U.S. dollar swaps using the Secured Overnight Financing Rate (SOFR). Second, the International Swaps and Derivatives Association (ISDA) supplemented its protocol for derivatives contracts to facilitate the use of risk-free reference rates. Both of these market milestones have prompted corporates to engage in LIBOR transition planning and review the economic, accounting, and operational implications.
(Related insights: Register for the webinar, “LIBOR Transition: Key Action Items for Corporates” and access additional LIBOR transition content on our website.)
Moderna announced today that its vaccine reduced the risk of COVID-19 infection by 94.5%, adding to the potential of controlling the pandemic. In the coming weeks, Moderna and Pfizer will seek to receive authorization for their vaccines from the Food and Drug administration. If received, the conversation will become focused on the timing of manufacturing and distribution of the vaccines.
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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.20-0445
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This proprietary checklist is informed by Chatham Financial's team of hedging, regulatory, and accounting advisors with visibility across 100+ banks and 3,000+ clients. By taking these 12 key actions, your treasury and accounting teams can confidently prepare for the transition from LIBOR to SOFR.
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