Market Minute: Volatility Trends Increase with Markets Near all Time Highs

Equities may close lower this week after certain economic risks have presented a challenge for market participants. The port strike temporarily has been averted, but geopolitical conflict escalation and the resultant rise in energy prices may impede on the disinflationary progress of the economy. Negative economic turbulence has caused a rise in the volatility index even as the markets trade near all-time highs. The U.S. economy remains strong with both fiscal and monetary policy providing a tailwind for risk-taking as the uncertainty surrounding the upcoming election narrows.

Both stocks and long-duration bonds have traded slightly lower this week as a rise in the dollar pushed long term Treasury yields to their highest level in several weeks. Rising ten-year Treasury rates may be signaling that either economic conditions remain sound, or fixed income investors have been scrambling to buy short-term Treasury bills as a precautionary liquidity grab. The rise in the dollar can be attributed to actions taken by global central banks to lower rates in conjunction with the Fed. China has unleashed both domestic monetary and fiscal stimulus and the Japanese yen has fallen after the Japanese prime minister made dovish comments stating the economy is not in a position for higher rates. Hence, this action may have rekindled yen carry trade facilitating the firmness of U.S. dollar. With subdued risks of a yen carry trade unwind, and an inline or better than expected jobs report, the Fed may be on track for two 25-basis-points cuts this year. The more gradual pace of rate cuts signifies the economy is still on solid footing and the stock market definitely follows the economy.