Daily Market Color October 26, 2018Volatility Persists as Stocks Tumble, Treasurys Rally A Spooky October Yesterday’s rally in equities proved to be short-lived as major indices tumbled yet again during today’s trading session. Risk appetite was tempered straight from the open as markets reacted to the sub-par earnings results from tech giants Amazon and Google released yesterday evening. The tech-heavy Nasdaq finished the deepest in the red (-2.06%) and is now down 11% in the month of October — on pace for its worst month since 2009. The S&P 500 (-1.73%) and DJIA (-1.19%) didn’t fare much better and once again have crossed into negative territory on the year. Consistent with this week’s flight to safe haven assets, US Treasurys rallied throughout today’s session, with yields/swap rates falling 3-6 bps across the curve. The 10-year note yield is set to close the week near 3.075%, ~12 basis points lower than where it opened the week. In commodity markets, WTI crude oil futures managed to inch higher on the day to $67.55/barrel, helped by the news that Iraq would comply with US sanctions on Iran come early November. However, crude declined 2.2% for the week as increased supply concerns out of Saudi Arabia coupled with the equity market downdraft weighed on crude prices. Economic Growth in the US Remains Strong The Commerce Department’s initial estimate of third-quarter GDP garnered the spotlight during the early portion of today’s trading session, reflecting a seasonally adjusted rise of 3.5% (+4.2% previous quarter). The quarterly pace exceeded expectations of 3.4% growth, driven by robust levels of consumer spending (+4.0% QoQ annualized) and government spending (+3.3% QoQ annualized). An unexpected area of weakness in the report and perhaps a harbinger of a future slowdown was the tepid 0.8% rise in business investment, representing the slowest pace since 2016. Additional growth concerns leading into next year include the ongoing international trade battles, tightening US monetary policy and the lessening impact of fiscal stimulus efforts. The US dollar rallied to a two-month high immediately following the release of the GDP report, but eventually gave up those gains to finish 0.28% lower against major currencies. SOFR Named a Benchmark Rate Yesterday the Secured Overnight Financing Rate (SOFR) joined the ranks of the US Treasury rate (UST), London interbank offer rate (LIBOR), overnight index swap (OIS) rate, and Securities Industry and Financial Markets Association (SIFMA) muni rate as an eligible benchmark rate as defined by the FASB. Why is this important? A key component of hedge accounting when converting fixed interest rate instruments to variable rate instruments or when hedging a forecasted purchase or issuance of a fixed rate instrument is the concept of the benchmark interest rate. If an entity uses a benchmark interest rate in its hedge relationship, the accounting treatment is simplified and there is less potential earnings volatility. Overall, the update will assist companies in preparing to transition away from LIBOR over the next few years. For those entities that have not adopted ASU 2017-12, the SOFR benchmark status will be effective at the same time ASU 2017-12 is adopted. For those public entities that have adopted already, the amendment is effective for fiscal years beginning after December 15, 2018 and for all other entities that have adopted, the effective date is for fiscal years beginning after December 15, 2019.