Two event-risk-packed weeks loom for markets as bond and currency volatility indicators rise Vanguard portfolio managers increase investments in cash
LONDON, Oct 25 (Reuters) – Investors around the world are looking ahead to a crucial two-week period when the United States and Japan elect their leaders, the three major central banks decide on interest rates and Britain’s new government. People are rushing into the US dollar and betting on higher volatility. Present your budget.
The US currency hit a three-month high this week on the strength of the US economy and a possible victory for former Republican President Donald Trump in the November 5 election. On the other hand, indicators derived from financial contracts called options are used to hedge risks. Market movements indicate investors expect currency and bond volatility to spike over the next month. Still, stocks have largely remained calm on the back of strong U.S. data and earnings, although the VIX index (.VIX) opens a new tab for predictive stock indexes. Market volatility is above average for 2024, suggesting potential for turmoil ahead.
“It’s going to be an incredibly volatile two weeks,” said Ales Koutney, Vanguard’s head of international rates, who said the bank had sold some assets to raise cash.
“We’ll start to see some volume increase going forward, but it won’t subside until the week after the (U.S.) election.”
Trump trading
Trump is tied in polls with Democratic Vice President Kamala Harris. But investors are taking cues from the betting market, where the odds have shifted in President Trump’s favor. The dollar has risen more than 3% so far in October as markets brace for a potential rally as bond yields rise towards three-month highs. A Trump victory could impose tariffs on the United States, pushing up inflation and forcing the Federal Reserve to raise interest rates.
Trade concerns pushed a measure of the euro’s expected volatility over the coming month to an 18-month high.
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“We have shifted our portfolio to be defensive,” said Marlboro fixed income portfolio manager James Asay, adding that he expected the dollar to rise further and had reduced exposure to U.S. Treasuries in favor of German government bonds.
Investors wary of inflation and populism are rushing into gold, Opens in a new tab, Bank of America said on Friday, while data from Citi shows hedge funds are piling into the dollar. Shown. Markets may be underestimating the risks posed by geopolitics and impending elections, the International Monetary Fund said. I was warned this week.
american giant
But the bigger driver pushing the dollar higher is the unrelenting strength of the U.S. economy. Better-than-expected jobs data, retail sales and jobless claims led investors to back off on expectations for the Federal Reserve to cut interest rates.
The October jobs report on Nov. 1 could be a flashpoint and could influence the Fed’s interest rate decision six days later, with traders previously speculating on the possibility of a second 50 basis point rate cut. However, we now expect a 25 basis point cut in interest rates.
Bond yields rebound as traders grapple with the Fed’s decision, pushing a measure of expected volatility in the $27 trillion Treasury market to a 10-month peak (.MOVE) opens in new tab. The MOVE index of implied volatility in the US government bond market rose to its highest level since December 2023. Additionally, the CBOE Skew Index (.SKEWX), which measures demand for financial contracts called options that pay out if a stock’s price falls significantly, is near levels that would normally indicate anxiety.
Overall stock prices have remained relatively calm, with the S&P 500 index down modestly by 0.9% this week.
Oliver Blackbourn, multi-asset manager at Janus Henderson, said strong earnings from companies such as Tesla (TSLA.O) and solid U.S. economic data are keeping the stock market calm.
Artemis bond manager Liam O’Donnell has been buying five-year U.S. Treasuries in the past two days, with the market exaggerating how high U.S. interest rates will remain if Trump wins. He said he thought so.
voting, policy
Meanwhile, Britain’s Labor government will table its first Budget on Wednesday after taking power in July, ahead of the Bank of England’s interest rate decision on November 7.
The event lingers on memories of the bond market crash following Chancellor Liz Truss’ disastrous 2022 Budget.
British government bond yields soared on Thursday after Chancellor of the Exchequer Rachel Reeves announced changes to fiscal rules to allow more borrowing and investment. The gap between UK and German 10-year bond yields has widened to its highest level in more than a year. Partly due to budget nerves, Allianz Global Investors, PIMCO, abrdn and Artemis say they are keen on gold, betting that yields are rising too high.
“We recently initiated long-term holding positions in government bonds,” said Linda Raghi, senior fixed income investment manager at Pictet Asset Management. “We believe the budget is focused on supporting growth and think there is scope for government bonds to outperform once event risk passes.”
Japan’s politics and central bank are also at stake after interest rate hikes and a strong yen sparked market turmoil around the world in August. Japan’s ruling Liberal Democratic Party lost its majority in Sunday’s snap election and could form a coalition with opposition parties that support monetary policy. stimulation.
The Bank of Japan is expected to keep interest rates unchanged on Oct. 31, with traders watching for hints of an outlook that could change the yen’s decline of more than 8% since mid-September.
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Reporting by Harry Robertson and Naomi Rovnick. Edited by Dhara Ranasinghe and Emelia Sithole-Matarise
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