Equities, yields tumble as virus fears mount

March 2, 2020 Chatham Financial

Prior week summary

Global equity indices plummeted last week, sending the three major U.S. equity indices into correction territory, as the worsening COVID-19 outbreak dominated headlines and stoked fear among market participants about the new virus’ potential to disrupt the global economy. The Dow Jones Industrial Average closed nearly 3,000 points lower from the week prior and the 10-year U.S. Treasury yield fell to its lowest level in history on Friday to 1.13%. Global cases of COVID-19 increased at a rapid pace over the week with the outbreaks in Italy, South Korea, and Iran receiving considerable media attention. As of Sunday evening, the global infection count sits just under 90,000 with total fatalities rising above 3,000. Cases in Italy gained significant attention throughout the week as the country reported nearly 1,500 new cases and over 30 additional deaths. The rise in cases internationally soured investment sentiment globally and has increased bets that the Federal Reserve will cut the target range. The Fed Funds futures market is now pricing in four rate cuts by the end of 2020, up from two rate cuts priced in at the start of the week, with the first cut expected to take place at the conclusion of the FOMC’s next meeting on March 18. Federal Reserve Chairman Jerome Powell released a statement on Friday afternoon signaling that the Federal Reserve is poised to act if the situation gets worse saying, “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.” The United States reported 52 cases since last Sunday and two deaths, the first in the U.S. Two cases, one in California and one in Washington state, suggested community spread of the virus, infections occurring in patients with no travel history to known infected areas and no known contact with existing COVID-19 patients. Speaking after reports of the first COVID-19 death in Washington state, CDC spokesperson Dr. Nancy Messonnier said, “We will continue to respond to COVID-19 in an aggressive way to contain and blunt the threat of this virus. While we still hope for the best, we continue to prepare for this virus to become widespread in the United States.”

The economic data releases were mixed for the week. New home sales in January soared above analyst expectations, rising 7.9% month over month. According to the second estimate of fourth-quarter GDP, the U.S. economy expanded at a 2.1% annualized pace, in line with both consensus expectations and the first estimate. The Chicago PMI posted a reading of 49.0 for January, remaining in correction territory but significantly above December’s 42.9 reading.

The look forward

Market participants are looking forward to a busy week of economic data releases with updated figures on the ISM Manufacturing Index, ISM Non-Manufacturing Index, construction spending, factory orders, and the February non-farm payroll report topping the bill.

Rates snapshot

 

Market implied policy path (Overnight indexed swap rates)

Source: Chatham Financial

 


Disclosures

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. 20-0047

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