Uneasy calm shrouds global markets before US elections
It’s happening again.
Markets around the world, from stocks to metals and bonds, have slowed to a crawl, revisiting lows in volatility that have stood for two years. Muted moves just sent a cross-asset gauge of price swings in equities, rates, currency and commodities to the lowest since 2014.
That everything should go quiet at once just before the US election is especially alarming to a cadre of market watchers who see threats stretching from Washington to Beijing. They see a rerun of past bouts of torpor that sometimes ended spectacularly, a consequence of efforts by central banks to keep the ugly side of markets hidden.
“It’s a very perverse situation,” said Stephen Jen, chief executive officer at Eurizon SLJ Capital Ltd. in London and a former International Monetary Fund economist. “Investors have no choice. Even those who have been quite concerned need to deploy capital in a way they feel uncomfortable with. It’s not that they feel complacent. They’ve been forced into this.”
How quiet is it? Bank of America Merrill Lynch’s GFSI Market Risk Index, a measure of future price swings implied by options trading on global equities, interest rates, currencies and commodities, has fallen for five straight days, the longest such streak since May. It now sits at the lowest level since December 2014.
Tranquility is pronounced in the Treasury market. The Merrill Lynch Option Volatility Estimate, a gauge of expected price swings in the government-issued securities, is at a level it hasn’t seen in two years.
Not everyone sees evidence of distortion. While risks exist, the drop in market anxiety has coincided with a reduction in uncertainty when it comes to US politics and policy. Hillary Clinton’s odds of victory are close to the highest on record at 86.5 per cent, according to forecaster FiveThirtyEight. That’s up from 54.8 per cent on September 26, the date of her first debate with Donald Trump.
Likewise, investors appear to be coming to terms with the inevitability of a Federal Reserve interest-rate increase in December. Traders are pricing in a 72 per cent chance of a rate hike in December, up almost 10 percentage points from a week ago, based on the assumption that the effective Fed funds rate will trade at the middle of the new FOMC target range.
“Until we get something that really surprises the market, we’re going to continue in this low volatility,” Hank Smith, who helps manage more than $6 billion as chief investment officer at Haverford Trust Co. in Radnor, Pennsylvania, said by phone. “Neither the election nor the Fed’s rate decision have people particularly worried right now.”
Traders may also perceive a clearer outlook for global monetary policy after the European Central Bank and the Bank of Japan last week signalled no urgent need to reduce asset-purchase programmes.
Diminished price swings have encouraged investors to pile into higher-yielding emerging-market assets. Exchange-traded funds that buy stocks and bonds in developing nations have attracted about US$24 billion over the past 21 weeks, the best run in more than a year, according to data compiled by Bloomberg.
In a note published Tuesday, Morgan Stanley’s strategists advised their clients buy currencies including the Brazilian real, Russia’s ruble and the Indonesian rupiah against the dollar, citing “strong risk appetite” and reduced levels of volatility.
“There are still people that are sceptical about the Fed, but there’s certainly been movement toward the idea that they’ll do something after the election,” John Carey, a Boston-based fund manager at Pioneer Investment Management, which oversees about $230 billion, said by phone. “While a small rate increase will likely have minimal impact on the economy, it’s much more consequential to investor psychology.”