Virus resurgence complicates reopening plans
- July 20, 2020
Week began shaky as resurgence of COVID-19 dampened investor sentiment and renewed fears that the country could be headed for more lockdowns.
Prior week summary
The major U.S. equity indices ended the week mixed with the S&P 500 marching higher for the third consecutive week on the back of encouraging news on the vaccine front. The week began on shaky footing as the resurgence of COVID-19 in the southern U.S. and California dampened investor sentiment and renewed fears that the country could be headed for more lockdowns. As of Sunday evening, the U.S. infection count sits just below four million confirmed cases, over a quarter of the global case count, with nearly 150,000 individuals succumbing to the virus. California has seen a steep rise in both infections and hospitalizations in recent weeks with the state reporting nearly 6,000 new cases on Sunday. On Monday, California Governor Gavin Newsom re-imposed many of the lockdown measures taken at the beginning of the virus outbreak, shuttering bars, banning indoor dining, and closing many non-essential businesses in the hardest-hit counties. Further dampening the mood, California’s two largest school districts, Los Angeles and San Diego, announced that schools will not open their doors this fall and will instead hold all classes online. The recent resurgence in the virus has seemingly increased the likelihood of another round of stimulus from Congress. Speaking to reporters last week, White House Economic Advisor Larry Kudlow, outlined the Trump administration’s goals for the next installment and was confident that talks for another round of stimulus would begin shortly saying, “The President does want a payroll tax holiday, and that, along with restricting COVID liabilities for small business restaurants and so forth, and one of the key aspects of our asks for the next round of CARES Act, which will probably be discussed beginning the week when the Senate returns.”
Market participants received a deluge of economic data updates over the last week and the results largely suggested a recovering U.S. economy as state economies began reopening in recent weeks across the country. On the manufacturing front, the data suggested a continued rebound in both production and sentiment. The Empire Manufacturing Index rose to 17.2 in July, well below pre-pandemic levels but well above the -0.2 level seen in June. The Philadelphia Fed’s Manufacturing Business Outlook survey fell slightly in July to 24.1 but fared significantly better than analyst calls for an 18.1 reading. Industrial production rose 5.4% in June, well above analyst expectations and the modest uptick seen in May. Analysts warn that while the pickup in industrial production is an encouraging sign for the manufacturing sector, industrial production remains nearly 11% below the pre-pandemic levels seen in February. Consumer prices rose 0.6% in June as measured by the Consumer Price Index, the biggest increase since 2012, with a rise in energy prices accounting for roughly half of the increase. While prices have risen in June, the Consumer Price Index has risen only 1.2% year over year, well below the Federal Reserve’s 2% target. Following a record increase in May, retail sales increased 7.5% in June, well above expectations. Retail sales figures have seen a stellar rise in the last two months, but many warn that the recent resurgence in COVID-19, which has caused some states to re-impose lockdown measures, is not reflected in the data and could hamper the recovery of the U.S. consumer. A host of Federal Reserve officials held speaking engagements throughout the week. Speaking at the Economic Club of New York, St. Louis Fed President James Bullard, looked to justify the rebound in equities since the sell-off in March saying, “Equity markets are something we don’t usually talk about at the Fed. I think they have been optimistic and they have been right, I think, up to now anyway,” and noted, “They were optimistic in the May-June time frame and indeed the data came in and validated the market thinking.”
The look forward
The economic data releases for the week are light with updated figures on new and existing home sales, jobless claims, and the IHS Markit flash indicators for the manufacturing and service sectors dotting the economic calendar.
Market implied policy path (Overnight indexed swap rates)
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.20-0232
Our featured insights
On Friday, October 23, the International Swaps and Derivatives Association (ISDA) launched the IBOR Fallbacks Supplement and Protocol, which provides a framework for transitioning interest rate derivatives from USD LIBOR to SOFR.
Despite faltering stimulus bill negotiations, rising COVID-19 cases in the U.S. and Europe, and troubling COVID-19 vaccine developments, the major U.S. equity indices marched higher for the third consecutive week.
Negative interest rates inch closer to reality in the UK as the Bank of England checks on banks’ readiness. The following summarises why the topic is being raised again and a reminder of previous Chatham insights on the subject matter.
The major U.S. equity indices moved higher for a second consecutive week as hopes for a breakthrough in stimulus package negotiations, positive COVID-19 treatment developments, and better-than-expected economic data improved investor sentiment despite rising COVID-19 cases in the U.S. and Europe.
Despite growing signs of a slowing recovery for the U.S. economy, a continuing rise of COVID-19 cases across Europe, and faltering stimulus bill negotiations on Capitol Hill, the major U.S. equity indices moved higher for the week with the S&P 500 snapping a four-week stretch of declines.
The major U.S. equity indices ended the week mixed with the S&P 500 moving lower and the Nasdaq breaking higher as market participants digested a renewed surge of COVID-19 cases in Europe, stalled stimulus bill negotiations on Capitol Hill, and mixed economic data in the U.S.
The major U.S. equity indices moved lower for a third consecutive week as mixed economic data releases and stalled stimulus bill negotiations soured investor sentiment.
While economic data releases for the week were light, market participants received updates on the labor market as well as the latest readings on inflation.