If one could ignore the upcoming US presidential election and the increased geopolitical tensions between Russia and America over Syria, the global investment backdrop shows signs of improvement. The global earnings season is in full sway and looks like providing the first year on year earnings growth for five quarters. The blended earnings growth rate for this quarter for the companies in the S&P 500 so far is 1.6%, against expectations at the start of the quarter of -0.5%. The picture in Europe is similarly an encouraging one. Economic growth appears to be picking up, which is also being reflected in leading economic indicators. So far all this good news is being met with a degree of indifference by equity investors as equity markets remain in an almost comatosed state with the lack of volatility.
What is worth highlighting, despite the lack of volatility in equity markets, is the index that is designed to reflect or gauge implied stock market turbulence has been ticking higher throughout the month of October. The Vix index rose again on Monday to close above 18. This rise would suggest that investors are starting to pay up to insure their portfolio’s in anticipation of some volatility in equity prices.
So, what may be causing investors to pay up for insurance? One obvious upcoming event that could derail the rosier outlook is the prospect of Donald Trump entering the White House in the coming weeks. Only a few days ago Hillary Clinton appeared to be strolling into the Oval office. The announcement from the FBI that they wish to return to the email investigation has rocked that boat. One poll on Tuesday put Trump ahead, and the spread betting market which had him 5/1 against a week ago that has shortened to 3/1.
Another possibility is an anticipation of a disorderly sell off in the bond market as the economic data improves and central bankers look like they are starting to ease up on the liquidity push. Bond prices did fall in October however so far the weakness in bond prices, has been moderate. Yields in ten year US treasuries remain lower than where they started the year, as do yields on 10 year gilts. The Vix index which measures equity volatility has an equivalent in the bond market, TYVIX. Currently the TYVIX index has crept higher, but remains close to the lows of the year. Unlike the equity equivalent which is close to a 3-month high. At present this would suggest that bond holders are not yet anticipating a sharp selloff in the bond market. But it will be worth keeping an eye on.