Volatility is expected to be a feature in U.S. equities for the duration of the U.S. presidential campaign as investors weigh up the possibilities of a second term for President Donald Trump or a victory for Democrat nominee Joe Biden.
The CBOE volatility index, or VIX, has been at historically high levels for much of the time since the coronavirus sent shockwaves through financial markets in March.
Monetary and fiscal stimulus gradually eased the so-called fear gauge down to a reading of 21.1 on Aug. 10 after it had shot to a record 82.7 on March 16. But volatility rebounded in early September as the S&P 500 dropped back, and the VIX was up to 26.3 on Sept. 29 even as equities regained their footing.
Analysts pointed to the uncertainty in the outcome of the U.S. election as a persistent source of nervousness in the market.
"We expect near-term volatility to persist as investors balance the prospects for further fiscal stimulus against continued U.S. political uncertainty, which has been accentuated by President Donald Trump's announcement of Judge Amy Coney Barrett as his nominee for the Supreme Court," Mark Haefele, chief investment officer at UBS Wealth Management, wrote in a market commentary.
The prospect of a contested election or drawn-out vote count adds to the air of uncertainty, said Sandrine Perret, senior economist at Vontobel Wealth Management.
"Higher volatility will remain until we know the outcome with certainty," Perret wrote in an email. "As the 2016 race showed, the higher the uncertainty regarding election outcomes, the larger would be the market reaction from either candidate's victory and expected policies."
The ICE Bank of America investment-grade U.S. corporate spread against U.S. Treasurys has been much calmer, rising by just 7 basis points between Sept. 22 and Sept. 29, to 144 bps.
"[We] retain a modestly constructive view on investment grade spreads in general, though have sought to take more relative value risk at an issuer level, rather than relying on market direction," Mark Dowding, CIO at BlueBay Asset Management, wrote in a market commentary.
But the past week was a bumpier ride in the high-yield market, where the spread climbed from 545 bps on Sept. 22 to 564 bps, the highest since July 17, on Sept. 24, before dropping back to 550 bps on Sept. 29.
The emerging market corporate spread also rose, climbing from 350 bps on Sept. 22 to 368 bps on Sept. 29, the highest level since July 31.
The Libor-OIS spread, a key risk indicator for the U.S. banking sector measuring the difference between the three-month dollar London interbank offered rate and the overnight indexed swap rate, was 14.5 bps as of Sep. 30, up from 13.5 bps on Sept. 23.
In the leveraged-loan market, the share of issues priced below 80 cents on the dollar, a closely watched indicator suggesting a company is more likely to default, rose to 5.07% on Sept. 29 from 4.89% on Sept. 22.
