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Futures

CME Group to Launch Mortgage Rate Futures in January 2025

2024-11-19

The CME Group, a leading global provider of financial futures and options, is set to make a significant move in the financial markets. In January 2025, they will be launching Mortgage Rate futures, a new product that is expected to have a profound impact on the mortgage industry and the broader economy.

Unlock New Opportunities in the Mortgage Market with CME Group's Futures Launch

Impact on the Mortgage Industry

The introduction of Mortgage Rate futures by the CME Group is likely to bring about several changes in the mortgage industry. It will provide market participants with a new tool to manage interest rate risk and hedge against potential fluctuations in mortgage rates. This could lead to increased liquidity in the mortgage market and more efficient pricing of mortgage-related products.

For mortgage lenders, the availability of Mortgage Rate futures will allow them to better manage their interest rate exposure and offer more stable loan products to borrowers. It will also enable them to hedge against potential losses due to rising interest rates, which is a significant concern in the current economic environment.

Benefits for Investors

Investors will also benefit from the launch of Mortgage Rate futures. They will have the opportunity to gain exposure to the mortgage market without actually owning physical mortgages. This can be a valuable addition to their investment portfolios, especially for those looking to diversify their holdings and manage risk.

Moreover, Mortgage Rate futures can be used as a hedging tool to protect against potential losses in other parts of their investment portfolios. For example, if an investor holds a significant amount of bonds and is concerned about rising interest rates, they can use Mortgage Rate futures to offset some of the potential losses.

Market Dynamics and Implications

The launch of Mortgage Rate futures is likely to have a significant impact on market dynamics. It will introduce a new source of trading activity and liquidity in the mortgage market, which could lead to more efficient price discovery and improved market efficiency.

However, it also poses some challenges and risks. For example, there is a potential for increased volatility in the mortgage market as traders and investors adjust to the new product. There is also a risk of mispricing or market manipulation, which could lead to losses for market participants.

According to Nikhil Sharma of Reuters, Canada's main stock index experienced a significant drop to a more than one-week low on Tuesday. This downturn was triggered by the escalating tensions between Russia and Ukraine, which led to a global rush towards safe-haven assets. The Toronto Stock Exchange's S&P/TSX composite index fell by 164.68 points, or 0.66%, settling at 24,812.26. Russian President Vladimir Putin took a significant step by lowering the threshold for a nuclear strike in response to a broader range of conventional attacks. Additionally, Moscow claimed that Ukraine had struck deep inside Russia with U.S.-made ATACMS missiles. These events had a profound impact on the global markets, with Wall Street's main indexes also showing a downward trend. [.N]

Impact on Annual Inflation Rate

In October, Canada's annual inflation rate accelerated more than expected to 2%, which likely diluted the chances of a large interest rate cut by the Bank of Canada in December. This was the first pick-up in the annual inflation rate since May. On a monthly basis, the consumer price index rose by 0.4% in October after two consecutive monthly declines, as reported by Statistics Canada. Traders have now adjusted their bets for a 50-basis point rate cut next month, reducing it from 36.4% earlier in the day to 25.6%. The central bank had previously slashed its key policy rates by half a percentage point in October to stimulate the economy as inflation had fallen below its 2% target.

Sector Performance

At least 10 sectors on the index suffered losses, with healthcare leading the way with a 1.5% decline. The information technology shares also experienced a significant setback, losing over 1%. However, the materials sector was the only outlier, rising by 0.4% supported by the climb in gold prices to a one-week peak as the U.S. dollar pulled back from recent highs. [GOL/]

Individual Stocks

Among individual stocks, TC Energy forecasted its 2025 core profit to be in the range of about C$10.7 billion ($7.63 billion) to C$10.9 billion ($7.78 billion), which is higher than its 2024 forecast. Despite this positive outlook, its shares slipped by 0.5%. These individual stock movements highlight the complex nature of the market during this period of geopolitical uncertainty.

Reuters reported on November 19, 2024, at 18:22 IST. The yen witnessed a significant jump, rising 0.5% against the dollar and 0.8% against the euro. This marked its highest level since October 4, reaching 161.50. Investors flocked to safe-haven currencies like the U.S. dollar, Swiss franc, and yen following Russia's updated nuclear doctrine warning. President Vladimir Putin issued a stern warning to the United States on Tuesday. It came after the Biden administration allowed Ukraine to fire American-made long-range missiles deep into Russia. This led to a lowering of the nuclear strike threshold.The yen's performance was remarkable. It had fallen about 7% since October and had weakened past the 156 per dollar level for the first time since July last week. This put traders on high alert for potential intervention from Japanese authorities to stabilize the currency. The Swiss franc also saw an increase, rising 0.3% against the euro to 0.9325 after hitting 0.9305, its highest since early August.The U.S. dollar index, which measures the unit's value relative to a basket of foreign currencies, rose 0.25% to 106.46. It had hit 107.07 last week, the highest level since November 2023. Athanasios Vamvakidis, the global head of foreign exchange strategy at Bofa, referred to this as a typical risk-off move in forex following the Kremlin statement. He added that the market had been complacent on geopolitical risks and had been focusing on other themes. Positioning had been long on risk, becoming even more stretched after the U.S. elections.This month, the greenback has risen more than 2%. It was buoyed by reduced expectations of Federal Reserve rate cuts and the view that U.S. President-elect Donald Trump will adopt inflationary policies. The dollar started the European session with a small rise as investors closely watched Trump's search for a Treasury secretary. Names like Apollo Global Management Chief Executive Marc Rowan and former Federal Reserve Governor Kevin Warsh were being considered. Analysts pointed out that Warsh was seen as less protectionist than the other candidates. The perceived growing likelihood of him getting the job might have been a significant factor in the intra-day Treasury rally on Monday.In the Treasury market, U.S. Treasury yields edged lower on Monday. Traders were digesting a still-strong U.S. economy and the likely policies of a Trump administration. Chris Turner, the head of foreign exchange strategy at ING, said that given the large budget deficit, a candidate offering less of a counterweight to some of President-elect Trump's plans could see the long end of the U.S. Treasury market sell off and potentially soften the dollar too. Markets expect Trump to cut taxes, which could boost the budget deficit. Lee Hardman, the senior currency analyst at MUFG, said that the increasing likelihood of former Fed Governor Kevin Warsh as Treasury Secretary was reassuring for market participants as he could help rein in some of the more disruptive parts of Trump's policy agenda.Investors are also awaiting the euro area's negotiated wage figures due on Wednesday and regional purchasing manager surveys on Friday. These could be crucial for the European Central Bank's policy decision in December. Markets are fully pricing a 25 basis-point rate cut and a bit less than a 20% chance of a 50 bps move, which some analysts believe is still on the table. On Monday, two top ECB policymakers signalled that they were more worried about the damage that expected new U.S. trade tariffs would do to growth than any impact on inflation. The euro dropped 0.4% to $1.0553, mainly due to the risk-off move prompted by Putin's warning. It had hit $1.0496 last week, the lowest since early October 2023. Elsewhere, the Australian dollar last traded at $0.6491. The Reserve Bank of Australia provided indirect support by reiterating that interest rates were unlikely to be cut soon and might even have to be raised under certain scenarios.