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Column: How the market learned to stop worrying and love the blue wave

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© Reuters. FILE PHOTO: A street sign, Wall Street, is seen outside New York Stock Exchange (NYSE) in New York City, New York

By Mike Dolan

LONDON (Reuters) – Just about the only market consensus all year on next month’s U.S. election was that it would be volatile around the vote – but even that’s turning upside down three weeks before polling.

A narrow and disputed election result has been one of the main investor fears for months. Bank of America (NYSE:)’s October global fund manager survey still had 60% of its respondents expecting the result to be contested – and three quarters said it was the outcome likely to cause most market disruption.

But with Democratic challenger Joe Biden’s consistent opinion poll lead since May widening into election day, bookmakers’ odds on a clearcut outcome and Democrat clean sweep of the White House and both Houses of Congress are narrowing.

Investment banks and asset managers, who have for decades argued markets would baulk at tax and spend policies and prefer congressional gridlock to curb any excesses, are now positively embracing the likelihood of a clean sweep for a Democratic Party expected to spend big and also raise wealth and corporate taxes.

With less than a month to go, Wall Street stocks are racing to record highs again and long-elevated implied volatilities of the S&P500 benchmark – the VIX ‘fear gauge’ and its November and December futures contracts – are draining to 6-week lows.

Opinion polls now put Biden’s lead over incumbent Donald Trump in double digits, almost twice September levels. Bookmakers in Europe put Trump as the 7/4 outsider, his longest odds of the campaign, and the Democrats are now favorite to take to take key swing states – Arizona, Florida, Michigan, North Carolina, Pennsylvania and Wisconsin.

Online market PredictIt puts the chance of a Biden White House as high as 66% and a Democrat clean sweep at 59%.

Far from running scared, the investment world appears to be embracing all that.

A “blue wave election outcome has curiously flipped from consensus bear to bull catalyst in recent months,” Bank of America’s investment flow strategists said on Friday.

“The more likely a sweep, the less likely we see a prolonged election outcome,” Morgan Stanley (NYSE:)’s cross-asset strategist Andrew Sheets added.

JPMorgan (NYSE:) strategist John Normand explains further: “The notion that the U.S. will soon deliver another round of sizable fiscal stimulus due to a Blue Wave is likely allowing investors to look through the current fiscal cliff, White House antics and even a contested election.”

“In simplest terms, a Democratic sweep reboots a U.S./global expansion that began around May, has been losing momentum since August and is at risk of a serious stumble,” he added. “Whatever one thinks about the course of regulatory policy, the margin impact of higher corporate taxes and the possibility of stealth deglobalization, what will matter more for the next 12 months will be front-loaded stimulus.”

SWEEP STAKES

So, barring a big upset from here, implied volatility may have been overcooked despite the twin uncertainties of the pandemic and an election – never mind persistent background angst about Brexit or yearend financial and economic stress.

Even taking account of an assumed exaggeration of the VIX due to its use as a hedging tool, a VIX () near 30 at the end of September implied 1-2% daily market swings over the next month. In other words, a lot of jitters were already priced.

The drop to as low as 24 over the past week – its lowest since August – looks more measured.

Although retaining a hefty premium at 28, the November and December VIX futures contracts are also at their lowest since late August as Democrat odds shorten.

Currency market volatility gauges <.dbcvix> too have fallen to their lowest since July. Only bond market vol – pricing the effects of a steepening yield curve after a big fiscal splurge – has tended in the other direction. ()

Some commentators point to the expected passing of Trump’s erratic decision-making style and ‘policy via Tweet’ as another reason for lower volatility ahead.

After spiking to record highs as the pandemic unfolded, the World Economic Policy Uncertainty Index – largely based on media references to policy concerns – has subsided too and September’s reading was back below August 2019 levels.

Yet, it’s hard to disentangle the effects of this year’s pandemic shock and massive rescues from the election itself.

Despite Trump’s relative unpredictability, there’s little evidence his tenure before COVID-19 was any more volatile for equities than the previous four years. Just prior to the pandemic, currency volatility was half that of 2016 and bond market vol had subsided too.

What has diverged from the VIX of late is the tech-heavy Nasdaq’s implied volatility () – now showing some of the biggest volatility premia over the wider market in 16 years. Whether that’s regulatory fears under a Democratic government or greater use of options to bet on their continued upside is debatable – but some see churn ahead when the election and the pandemic move into the rear view mirror.

“A Biden win could be the moment to shift away from Big Tech – but not necessarily for regulatory reasons,” Sheets said, adding a fiscal stimulus and a vaccine would steepen the yield curve and hasten the end of the “abnormal economic environment” that has disproportionately benefited Big Tech.

(The author is editor-at-large for finance and markets at Reuters News. Any views expressed here are his own)

(By Mike Dolan, Twitter: @reutersMikeD; Editing by Peter Graff)





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IMF endorses Japan PM Suga’s reform agenda, urges BOJ to review inflation goal By Reuters

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© Reuters. Japanese PM Suga walks past the Indonesian national flag as he arrives for a press conference in Jakarta

By Leika Kihara

TOKYO (Reuters) – The International Monetary Fund gave a thumbs-up on Wednesday to plans by new Japanese Prime Minister Yoshihide Suga to maintain the thrust of his predecessor’s “Abenomics” stimulus programmes, while pushing through reforms to revitalise the economy.

Odd Per Brekk, deputy director of the IMF’s Asia and Pacific department, also urged the Bank of Japan (BOJ) to consider reviewing its 2% inflation target to make it more flexible — repeating a recommendation made earlier this year.

“Such a review would provide the BOJ with an opportunity both to reconfirm its commitment to the target and to increase policy flexibility as needed,” he told Reuters in a written interview.

In succeeding Shinzo Abe as prime minister last month, Suga pledged to maintain the first two “arrows” of Abenomics – huge fiscal and monetary stimulus measures to prop up growth.

He also vowed to pursue a re-modeled version of structural reforms, such as steps to boost smaller firms’ productivity, promote digitalisation and consolidate regional banks.

“Giving renewed momentum to the ‘third arrow’ of structural reform would help in the recovery and in putting the economy on a longer-term growth path,” Brekk said.

“In this regard, reforms to promote the digital economy, revive regional economies, and deal with regional bank issues should be given high priority,” he said.

Labour market reforms, such as opening up more career opportunities for women and encouraging more telework, must also remain a priority, Brekk said.

Japan’s economy suffered its biggest postwar slump in the second quarter as the coronavirus pandemic slammed domestic and global demand, and analysts expect any rebound to be modest as uncertainty over the outlook weighs on consumption and capital spending.

FLEXIBLE TARGET NEEDED

The economy was already in recession before the health crisis due to the blow from last year’s sales tax hike. Regional banks are reeling from sluggish credit demand, a rapidly ageing population and narrowing margins from years of ultra-low interest rates.

With high uncertainty over the economic outlook, the BOJ should avoid a premature withdrawal of stimulus and wait until a recovery takes hold, Brekk said.

It could take additional steps if needed, such as an expansion of its special lending programmes, a cut in longer-term yield targets and an increase in purchases of exchange-traded funds, he said.

In the longer run, the BOJ should consider a review of its price target and policy framework to allow itself more room to address financial system risks, Brekk said.

Under yield curve control (YCC), the BOJ guides short-term rates at -0.1% and 10-year bond yields around zero as part of efforts to achieve its elusive 2% inflation target.

Years of heavy money printing and the adoption of YCC, however, have failed to fire up inflation, drawing criticism that the policies were doing more harm than good by hurting commercial banks and discouraging them from boosting lending.

Brekk’s comments followed those in a staff report in February, in which the global lender urged the BOJ to re-define its inflation target as a long-term goal with room for some allowances.

It said this would give the central bank more flexibility in whittling down stimulus to ease the pain on financial institutions.





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U.S. set to announce legal action on opioid maker By Reuters

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© Reuters. Signage is seen at the United States Department of Justice headquarters in Washington, D.C.

By Doina Chiacu and Susan Heavey

WASHINGTON (Reuters) – The U.S. Department of Justice on Wednesday will announce legal action involving an opioid manufacturer, the department said in a statement as officials have sought to stem the decades-long public health crisis involving painkiller addiction.

U.S. officials will “announce the results of the global resolution of criminal and civil investigations with an opioid manufacturer,” at a news conference scheduled for 11 a.m. (1500 GMT), it said.

The department did not identify the company involved.

But U.S. officials have been seeking to negotiate a settlement with Purdue Pharma LP, maker of the addictive pain drug OxyContin, and members of the wealthy Sackler family that own the drugmaker.

Painkiller addiction has claimed the lives of hundreds of thousands of people in the United States since 1999 while communities have sought to grapple with the financial and societal costs of the overdose crisis.

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Fed’s Bullard says U.S. can wait on fiscal aid, businesses adapting By Reuters

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© Reuters. FILE PHOTO: St. Louis Fed President James Bullard speaks about the U.S. economy during an interview in New York

(Reuters) – St. Louis Federal Reserve Bank President James Bullard on Wednesday repeated his view that U.S. businesses are largely adapting to life amid COVID-19 and the U.S. economy is on track to better-than-trend growth even without further fiscal stimulus.

“In terms of the aggregate resources it seems like we should have enough” fiscal aid to bolster growth until the first quarter of next year, when any further need could be reassessed, Bullard said at the Federal Home Loan Bank of Des Moines Leadership Summit.

Per-day fatalities per-million population in the coronavirus pandemic are down in the United States from the peak in the spring, he said, adding he does not expect a resurgence, or a second wave, by that metric.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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