Recent developments in the financial markets indicate a notable persistence in the VIX, which has remained ‘sticky’ above the critical threshold of 20, even as stock indices have experienced gains. The VIX—often referred to as the fear index—briefly spiked to 20.97 during the morning’s option expiration, marking its highest settlement since November 2022. This volatility suggests that while stocks are managing some upward momentum, there is still an underlying apprehension in the market. Traders are particularly focused on upcoming events, including the release of retail sales figures, which many anticipate will exceed expectations, and will likely precede calm before the anticipated volatility driven by the looming election outcomes and the Federal Open Market Committee (FOMC) meeting.
With respect to the political landscape, speculation about the upcoming election has intensified. Investor sentiment appears to reflect a belief that former President Donald Trump is leading in likely electoral outcomes, according to Stanley Druckenmiller, a prominent investor who spoke on Bloomberg Television. Druckenmiller’s observations regarding market behaviors—particularly regarding bank stocks and cryptocurrencies—indicate a bullish sentiment favoring a Trump victory. He also expressed skepticism about the Democrats gaining control of Congress, suggesting that a “blue sweep,” where the Democrats would dominate both the presidency and Congress, could present challenges for equities in the following months. In stark contrast, he believes a Republican sweep is more plausible than a Trump presidency paired with a Democratic Congress.
Market performance has been distinct among various sectors, with small-cap stocks, represented by the Russell 2000 index, significantly outperforming larger-cap indices such as the Nasdaq, which has been weighed down by ongoing concerns regarding major technology firms—specifically ASML. The day saw a notable short squeeze, indicative of aggressive trading activity among smaller companies and financials. The Nasdaq, while ending the day mostly unchanged, observed a decline in its performance relative to small-cap stocks, reinforcing a ongoing trend where smaller stocks are gaining traction amidst broader market fluctuations.
In terms of fixed income, the Treasury yield curve showed modest declines across all maturities, with the 10-year yield finding support around the 4.00% mark. Predictive measures regarding interest rates suggest a resurgence of expectations for rate cuts in 2025, returning to levels observed prior to recent payroll reports, while 2024 anticipations remain relatively hawkish. The compression in credit spreads highlights a persistent calculation of risk in the markets, indicating that investors are not overly concerned about the potential for increased defaults or economic downturns at this point in the cycle.
In the currency markets, the dollar has achieved new heights, reaching its highest value since early August, yet this dollar strength has coincided with concurrent rallies in gold prices, which saw a new closing record high. This represents a notable decoupling, as traditionally, an appreciating dollar tends to exert downward pressure on gold prices due to the inverse relationship between the two. Additionally, Bitcoin continues to exhibit bullish tendencies, surpassing the $68,000 mark, a first since July, further underscoring the belief that a Trump victory could be catalyzing positive sentiment in digital asset markets.
Lastly, a significant concern has emerged regarding U.S. sovereign risk, which has surged to its highest levels in a year, raising pertinent questions about the market’s outlook. Nervousness about economic stability, upcoming political events, and Federal Reserve policies has contributed to this rise in risk perception. It signifies that, despite moments of optimism in equities and other asset classes, many investors remain cautious, highlighting the dichotomy between market exuberance in certain sectors and a broader apprehension about underlying economic conditions as we approach key financial and political events.
