The day has arrived that was probably marked as the most important of the year on a global political and economic level. The presidential elections in the United States are, every four years, the great catalyst of uncertainty and volatility in the markets, which discount in one way or another the victory of the Democratic candidate, more in line with increasing the fiscal deficit, or the Republican candidate, more protectionist. and deregulatory.
Thus, the market reaches this date with a feeling of tense calm while awaiting the results regarding the new president but also the balance of forces in Congress, key to carrying out the candidates’ electoral promises. In recent weeks, investors have unwound positions in the stock market, but especially in fixed income, where the expectation surrounding the next Fed meeting, the penultimate of the year, which will be held between this Wednesday and next, is also being quoted. Thursday.
What many analysts predicted for this period of the year is coming true, which was nothing more than a rebound in volatility. On Wall Street, the Vix index exceeds 21 points, reaching the second highest level of the yearonly behind the scare that spread from Japan to the rest of the markets at the beginning of August when the BoJ raised rates. This level is not only the second highest of the year, reflecting an S&P 500 that, from the highs of the year, drops just under 3%, but it is also above the average of the index in these 10 months of 2024 and the average even for the last five years.
“The presidential elections add an additional layer of uncertainty to the general economic situation,” they point out on eToro. At Generali they consider that “the markets seem very inclined towards a Trump victory, also discounting a high probability of Republican control of Congress.” “Prices may be distorted by the accumulation of a few very large bets,” they warn.
Historically, US and global equities tend to gain after elections as uncertainty decreases. According to Generali, “in a scenario of separation from Trump, we see positive returns in 3 and 12 months driven by fundamentals macro and the relationship of central banks while net exporters, such as the EU, have suffered.
At PIMCO they defend that “in many aspects there are fewer differences between the candidates than the market assumes. The deficits will be greater in both cases. They will have to deal with next year’s taxes once the tax cuts expire, they will have a hard line with China and an independent monetary policy by the Fed. “We only see differences in tariff and immigration policy, as well as in regulation,” they conclude. “A strong victory for Trump would initially boost the stock markets and we could see a fall if Harris dominates, while if Congress is divided, prices would be at the expense of the results and the forecasts of future business profits, but what It seems certain that volatility, under this scenario, would increase in the sessions after the vote and subsequently normalize,” they contribute from Portocolom.
The Fed quotes in Fixed Income
Volatility is not only in the stock markets, but is also shown in other markets such as fixed income. In this context, the Bank of America Merrill Lynch index that calculates this variable in debt operations in the United States exceeds 130 points, a level that has not been reached since October of last year, coinciding with the rebound that fixed income starred in the last quarter of last year.
However, what is being quoted here, in addition to an eventual Democratic or Republican victory, is the meeting that the Fed is holding this Thursday, in which it is expected a new rate cut of 25 points. Expectations of reductions in the price of money have cooled a lot in recent weeks since 75 points less were expected before the end of the year while now there is only a quarter of a point less after the latest inflation data .
“The most recent macroeconomic data suggests that the economy is evolving better than expected, along with a slightly higher than expected inflation rate. In line with this evolution, the market has progressively adjusted its expectations towards a less aggressive Fed, with a final interest rate that is expected to be somewhat higher”, stated in MFS. “To add complexity to the picture, the outcome of the US election earlier this week could significantly influence macroeconomic projections. A victory by former President Trump is likely to be perceived as the start of inflation, while a victory by Vice President Harris will be consider more aligned with the status quo. they add.
“The outcome of the US election could be the deciding factor in the market valuation of the Fed’s easing cycle in 2025. We expect greater short-term volatility in fixed income markets as investors digest the political implications of the election result,” they point out in Allianz GI. It must be remembered that after this meeting there will be no forecast update macro neither dot plotso the only factor to assess, in addition to the decision made itself, will be Jerome Powell’s message.
“The massive sell-off in October reflects a situation macro deeper: high fiscal spending and nominal NIP growth driven by persistent inflation, suggesting that the Fed could keep rates high for longer and reduce expectations of significant cuts in the near term,” they suggest on eToro. ” “Despite the volatility, Treasury bonds remain a refuge for investors against other riskier assets and, with these yields, demand will remain strong,” they add.
Finally, currencies have not been spared from extraordinary movements either. Specifically, the future of the euro/dollar cross reached a level of implied one-day volatility this Tuesday that had not been seen since Brexit, more than 8 years ago. “With either of the two candidates obtaining a full victory, the market could favor a strong dollar due to the expansionary measures,” they conclude in Generali.
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