Vaccine optimism fuels risk asset growth while rates remain rangebound
- November 30, 2020
Corporates | Kennett Square, PA
SummaryAs of noon on November 30, global stock markets exhibited record growth during the month of November, fueled by successive vaccine announcements being queued up for emergency approval by the U.S. Government.
During a year in which many new terms and phrases have been grafted into market lingo, we can now add “back to normal rally” to the lexicon. As of noon on November 30, global stock markets exhibited record growth during the month November, fueled by successive vaccine announcements being queued up for emergency approval by the U.S. Government. Representing a symbolic highlight, the Dow Jones Industrial Average peaked over 3000 for the first time on November 24, before retreating slightly in the days following. Market optimism spread beyond the U.S. as well, with European and Asian indices also showing record levels.
Many industries that have limped their way through the pandemic saw strong equity value growth during the shortened week which included the Thanksgiving holiday in the U.S. Airlines, cruise lines, entertainment, and fitness sectors all saw a surge in investment as the market has priced in a resurgence in these once-thriving industries. Beyond the vaccine headlines, several U.S. states certified their election results, further diminishing any remaining ambiguity surrounding the presidential election; as ever, the financial markets thrive on certainty. In another political development, the announcement of former Fed chair Janet Yellen as president-elect Biden’s Treasury Secretary was well received by the markets, renewing optimism of economic stimulus.
Despite the risk-on mentality, the market surge is juxtaposed against the reality of crowding hospitals, record daily cases of COVID-19, the threat of further lockdowns, and the looming consequences of holiday gatherings’ impact on the virus’s spread. This grim fact pattern seems to be better represented in rates markets, which have not matched the exuberance seen in equity markets. After peaking at 0.95% on November 10, the 10-year Treasury has since remained rangebound, hovering around 0.85% in the past two weeks. Other points in the Treasury curve followed a similar pattern with an early November steepening but flattening since. Indeed, while equity markets look ahead to normal economic spending patterns, rates markets seem circumspect about the pace of recovery and future inflation.
On the currency front, the U.S. dollar continues to fall in the risk-on environment, with the Dollar Index decreasing 2.6% during November, hitting its lowest point since early 2018. Other havens behaved similarly, with gold spot poised to have its worst month since 2016. Oil also pared back earlier gains, with Brent falling to $47.66 per barrel as of this writing.
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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.20-0454
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