Financial markets have been very quiet in recent days. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) has stabilised between 20% and 23%.
In the coming weeks, the downside potential of long-term interest rates seems limited. Moreover, the final stretch before the US presidential election promises to bring its share of news, good and bad. On the one hand, the US president will do everything possible to support growth up until the election. In particular, he will try by all means to announce a vaccine against Covid-19, which would, for example, benefit cyclical stocks more than defensive stocks. On the other hand, the potential for negative surprises is intact. Joe Biden leads in the polls, but nothing has been decided yet. If he is elected, his programme should ultimately support the recovery, but investors may fear a political bias too far to the left.
Liquidity overwhelms everything else
The number-one factor supporting equities clearly remains the growth of monetary aggregates. This money has to be invested somewhere and equities remain the cheapest liquid asset class. In the coming weeks, we do not expect central banks to change direction.
The risk, however, is with us. In fact, when volatility is high, markets are less risky.
The abundance of liquidity coupled with a subdued recovery has led to a collapse in bond-market volatility. We know from experience that modern financial markets build their own flaws when volatility stays too low for too long, as in 2017, which led us into the volatility shock of January 2018. It is impossible to predict when the cumulative positioning of investors will lead to dislocation after this period of excessive calm. The risk, however, is with us. In fact, when volatility is high, markets are less risky.
What is going on in the markets? Julius Baer’s experts share their views.