Thursday, November 14, 2024

Wall Street Event Risk Piles High in Markets Braced for Bad News

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(Bloomberg) — For markets bolstered by dovish central banks, expanding economies and receding inflation, the news as November begins is how vulnerable they’ve become.

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Long-standing pillars of strength are showing cracks. Tech earnings, a key catalyst for upside this year, have turned spotty, zapping a month’s worth of stock gains and sending the Nasdaq 100 to its first weekly loss in eight.

A historic stretch of lockstep gains in equities and bonds just skidded to a halt amid ubiquitous event risks that include a deadlocked presidential election and big questions about what the Federal Reserve will do with interest rates.

From stocks and Treasuries to currencies and commodities, rarely has anxiety been as pronounced at this point of the cycle. In one example, a gauge of cross-asset risk kept by Bank of America Corp. just jumped to the highest point of any pre-election week outside of the financial crisis.

Altogether it sets the stage for high drama for risk assets in a year that — until recently — was taking its place among the best in decades. Buttressed by solid earnings, the S&P 500 has been up as much as 23% in 2024, while measures of credit risk held near multi-year lows and Bitcoin surged 65%.

“We have taken advantage of the rise in equity prices over the last several weeks to derisk portfolios,” said Jim Caron, chief investment officer of the portfolio solutions group at Morgan Stanley Investment Management. “We believe there will be volatility around the elections and prefer to wait for the noise to die down and allow for the signal to reemerge.”

October’s declines halted a run of concerted gains in shares and fixed income that was the longest since at least 2007, going by the major exchange-traded funds. While Friday’s rebound pared a weekly decline for the S&P 500, risk appetite broadly receded ahead of a high-stakes week. Tuesday’s presidential vote has brought the issue of fiscal policy to the fore while the Fed on Thursday will test the resolve of bond bears, who recently trimmed wagers on fast monetary easing.

Trepidation is creeping up in hedging instruments. The Cboe Volatility Index, or VIX, saw its nine-day version — one now covering a timeframe that includes the election and Fed meeting — almost double in two weeks for the biggest increase since 2022. A similar measure for Treasuries, the ICE BofA MOVE Index, reached a one-year high while gauges rose for investment-grade bonds and currencies.

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