U.S. Elections and Market Dynamics

With approximately 50 trading days remaining until the U.S. elections, UBS strategists note that the election narrative is likely to gain prominence. This follows a period of market activity predominantly influenced by the Federal Reserve and macroeconomic factors.

Shift in Focus

A significant shift in attention is expected post-September FOMC meeting, where rate cuts are anticipated after Jackson Hole discussions. Markets project the Fed’s policy rate will decline to the 3.00%-3.25% range by the end of 2025, which represents over 2 percentage points lower than the current level.

Volatility Indicators

The report highlights that the S&P 500’s option-implied one-day move for the U.S. elections is currently above 2%, reflecting levels comparable to the 2020 election cycle. Moreover, the VIX election fly, a metric for election-related volatility, has experienced a slight rise but remains below its year-to-date highs.

Historical Comparisons

Drawing parallels with the 2020 U.S. elections and the 2017 French elections, strategists suggest that U.S. equity volatility could mirror similar patterns leading up to and after the election event.

They predict the ‘kink’ in the VIX term structure will likely remain stable or increase as the October options expiry approaches. UBS believes uncertainty may lessen if polling trends heavily favor one side, although risk premia may persist.

Sector Focus

In terms of sectors, UBS identifies Banks, Clean Energy, Biotech, Mexico, and China Tech as areas with pronounced U.S. election risk premia. The bank emphasizes that these sectors experienced some of the largest declines in implied volatility post-2020 U.S. elections.