By Mike Dolan
LONDON (Reuters) – In a year of elections worldwide, June turns up the heat several notches and will test global markets’ seemingly nonchalance toward the process to date.
With European Parliament elections as an early appetizer on June 6-9, Britain heads to the hustings next month too ahead of July 4’s freshly scheduled poll and U.S. presidential candidates look set to start their campaigns earlier than usual with a first televised debate on June 27. Mexico also heads to the ballot box during the month.
So far, with global business picking up steam again and interest rates plateauing, world markets seem in no mood to pay much heed in popular votes in the major economies. Major stock markets are at all-time records and volatility gauges on a range of assets and currency prices are all but asleep.
In thrall to the central bank metronome for two years, equity and credit markets even seem to have broken that spell this year – accepting a likely long period of relatively high interest rates ahead and focused instead on the buoyant economy, earnings and unfolding themes like artificial intelligence.
But June should give that a reality check, or at least reveal investor interest in potential shifts in democratic power in some of the big economies.
With critical geopolitical, trade and fiscal issues at stake, there are no shortages of potentially market-moving issues – most obviously in the re-run of 2020’s U.S. race between Democratic President Joe Biden and Republican challenger Donald Trump.
All the more surprising then that currency market volatility at large is less than half what it was a year ago.
And six-month implied volatility in major dollar exchange rates that now covers the U.S. election date is about two full points below where it was a year ago – easing substantially again over the past month.
And that’s not to mention equity volatility at four-year lows and even bond volatility subsiding to its lowest in two years.
A moment to hedge?
According to a quarterly survey of 250 finance officials at UK and U.S. companies conducted by FX platform MillTechFX nearly half said they plan on increasing currency hedging length in options or forward rates due to elections around the world.
And yet there’s scant sign of that showing up in prices so far.
FLICKERS OF SENSITIVITY
Many investors have long argued that markets tend to ignore elections until the final throes – screening out much of the political noise of campaigning and wilder early polling.
As election dates get nearer, the number and frequency of opinion polls ratchets higher – which improves their average accuracy but also ups the risks of periodic rogue readings.
And perhaps there was the merest flicker of that effect this week in the surprise UK announcement of a July vote – two or three months ahead of the date that many had bet on.
Two-month sterling volatility levels popped higher on the news – albeit from historic lows in the case of euro/sterling levels.
And yet strategists queued up on Thursday to detail why the outcome shouldn’t necessarily affect sterling or UK bond levels – with the opposition Labour Party more than 20 points ahead in opinion polls for many months. The Labour Party is the overwhelming favourite in betting markets to take power for the first time in 14 years and has few curve balls in its manifesto for markets to latch on to.
A bigger disturbance from the June campaign at this stage may well be if polls showed the incumbent Conservatives can hang onto office.
It’s a different matter stateside however.
Biden and Trump remain tied in popular surveys with attention being paid to swing states. There are clearly huge gaps between the two in domestic and international policy – as well as on the independence of the Federal Reserve, the value of the dollar, trade tariffs and tax cuts.
Noel Dixon, global macro strategist at State Street Global Markets, thinks the TV debates next month may be the starting gun for greater market attention – earlier than the traditional post-Labor Day klaxon.
What’s more, he says State Street’s models monitoring the asset market sensitivity to various media narratives surrounding the election are already picking up.
“There’s definitely more market attention being paid this time around than there was at the same stage in 2020,” Dixon said. “Because they’re moving the TV debates up, Trump now gets a chance to clarify his stance on some of the more alarming media stories about what he may do.”
“If he doubles down on those issues next month, there’s going to be a lot more market attention,” he said, referring to media reports about how his team are planning to reduce Fed independence and how his former trade adviser Robert Lighthizer advocates actively weakening the dollar for trade advantage.
How all that plays out in terms of price direction rather than volatility per se is harder to parse and perhaps why speculation on the outcome is so limited.
But even if investors have been intent on blurring out political noise in favor of focusing on the current state of economy, it may be harder to ignore it all a month from now.
The opinions expressed here are those of the author, a columnist for Reuters.
(Editing by Lisa Shumaker)
Comments