Volatile markets at least until the US elections

The volatility of the markets will last at least until the American elections, at least according to analysts. The sell-off in US government bonds has caused a crisis in recent days series of oscillations on the markets, from gold (which reached record levels) to currencies.

In fact, Treasuries are about to experience one of the worst months in recent years, with i ten-year yields which rose by almost 0.4 percentage points to 4.2%: economic data showing a healthy economy and the emerging “Trump trade” have pushed traders to review their expectations on the path of interest rates. Initially, after the ‘jumbo’ i.e. 0.50% rate cut by the Fed, they expected a similar move in the next central bank directives. But now, the strengthening of economic data and bets on the hypothesis of a victory by the Republicans, whose policies could raise inflation, investors are not taking a further easing of monetary policy for granted. According to Rob Burrows, government bond fund manager at M&G Investments, interviewed by the FT, with the strong employment numbers supporting the idea that less severe cuts would be necessary, the “market got scared”.
On the other hand, the dollar is experiencing its best month in the last two yearsappreciating by more than 3% in recent weeks. That pushed the yen below the 150 yen level to the dollar, while the Mexican peso also suffered, a victim of former President Donald Trump’s threat to impose tariffs on imported cars.

As explained to FT by Mark Cabana, head of the US rates strategy at Bank of Americarecent economic data have “thrown cold water” on the need for another half-point rate cut, thus “forcing” the market to scale back expectations of a recession in the United States. Meanwhile, volatility in the Treasury market, measured by the Ice BofA Move index, has reached in the days I saw the highest level since the end of last year.

“The uncertainty comes from multiple sources: from economic fundamentals, from the Fed’s reaction and from the political environment, which could lead to changes in fiscal policy,” explained Akshay Singal, global head of short-term interest rate trading at Citigroup . In his view, there is a scenario in which the Fed does not cut at all in 2025 and another in which it cuts by 1.25 percentage points or more. Several investors have said that the greater volatility and uncertainty comes from the greater market attention to employment data. And not only that: but they would also be fueled by the expectation of UK budget law and the US elections. This is because, according to observers, in the event of Trump’s victory, tariffs could increase, and tax cuts and other policies could be implemented that would fuel inflation, putting upward pressure on bond yields.

For all these reasons, observers believe that the next data on wages and the US labor market will be particularly important, even if they may not ‘dissolve’ this climate of uncertainty as it will be necessary to consider strikes (for example of port workers) and hurricanes in recent weeks.