Rising VIX ahead of the US election is consistent with historical patterns
Reading time:15 MIN
Current market commentary
The typical de-risking before an event risk, this time the US elections, took a particularly long time. But last week the time had come. Equities, bonds and also gold fell at the end of October. Possible triggers include good, but not outstanding Q3 reporting, renewed geopolitical risks in the Middle East and rising interest rates worldwide. In addition to positive macro surprises, higher inflation figures in some cases and increasing concerns about rising government debt triggered the rise in bond yields. Now the market is looking ahead to Tuesday's US election, with the next Fed meeting scheduled for immediately after. In addition, the Chinese parliament is holding a highly anticipated meeting from 4 to 8 November, at which further details of the economic stimulus packages are likely to be announced. Consequently, volatility is likely, especially below the surface. We remain constructive and believe the recent consolidation is healthy.
Short-term outlook
The next two weeks promise to be politically tense: On 5 November, the US will elect its new president, while the Q3 reporting season is also in full swing. 144 companies in the S&P 500 will report in the next two weeks.
However, there is also a lot of important economic data and central bank meetings coming up. The US starts on Monday with the ISM Services Index (Oct.). On Wednesday, the retail sales (Sep.) for Europe and on Thursday the interest rate decisions of the Fed and the Bank of England will be announced. At the end of the week, the Michigan Consumer Sentiment Index (Nov.) will be published. Next week, the consumer prices (Oct.) for Germany and the USA, the GDP (Q3) for Europe, Japan and the UK, and the retail sales (Oct.) and the producer price index (Oct.) for the USA are on the agenda.
Rising VIX ahead of the US election is consistent with historical patterns
- The VIX, a measure of the expected volatility of US equities, recently climbed to its highest level since early August. This development corresponds to the typical pattern of past US presidential elections and is no cause for concern.
- Regardless of the outcome of the election, the VIX has fallen with the certainty of an outcome. If the election is not contested, investors are likely to unwind hedges, the premium to the realised vol-atility is likely to fall and the market could mechanically rise.