How Do You Solve a Year Like 2016?
Fifty years ago, at the Academy Awards in Los Angeles, the Best Picture Oscar was given to The Sound of Music, a delightful film adaptation of Rodgers and Hammerstein’s very last co-written musical. It followed the circuitous path of a mercurial postulant named Maria, on her way from an Austrian convent to becoming governess of the von Trapp children, to eventual marriage to Captain von Trapp and escape from the Nazi Anschluss.
Early in the film, as fellow residents of Nonnberg Abbey marveled at Maria’s perpetual lateness and general unfitness for monastic life, they broke into song: “How do you solve a problem like Maria? … Unpredictable as weather, she’s as flighty as a feather!”
Metaphorically speaking, if years past could gather together and wax lyrical about 2016, perhaps they’d sing something quite similar, because this year has been among the most unpredictable in recent memory. The Chicago Cubs turned around a 3-1 deficit to win their first World Series in 108 years. In other events of global systemic import, two significant shocks that surprised many prognosticators and defied most polls – the Brexit referendum in June, and the American presidential election earlier this month – turned major political assumptions on their heads, and roiled economic markets in the process.
Here’s what has happened in the eight market days since the American election:
Interest rates: Ten-year USD swap rates rose 46 basis points, from 1.73% to 2.19%. By contrast, two-year USD swap rates rose just 20 basis points to 1.30%, a measurable steepening of the yield curve. The benchmark 10-year Treasury reached its highest level of 2016, up sharply following Fed Chair Janet Yellen’s testimony which many interpreted to augur for a December rate hike.
Exchange rates: The EUR-USD exchange rate dropped by 4%, down to 1.0593, as market makers began to speak about parity, a level that hasn’t been reached in fourteen years. Meanwhile, the yen also weakened more than 5% against the dollar, while most emerging currencies declined even more precipitously; as a consequence, central bankers from Indonesia to Malaysia intervened in financial markets to stem their currencies’ declines.
Equity markets: All three major U.S. equity indices hit price records, while U.S. equity funds also hit all-time records for weekly inflows.
Financial regulation: Representative Jeb Hensarling’s draft Financial CHOICE Act gained new traction as a possible future basis for financial regulation. According to a Davis Polk summary, the bill would completely repeal the Volcker Rule and bring other key changes to the CFPB and SEC. And while the section on OTC Derivatives would remain intact, the CFTC and SEC would be required to harmonize their Title VII rules, potentially resulting in some regulatory changes.
If there’s one thing 2016 has shown us, it’s that even “certain” outcomes cannot be counted upon. While we would not presume to try to predict what happens next, one thing is sure – in such volatile times, sage risk management and thoughtfully applied financial hedges are a few of our favorite things!