Risk Parity Market Environment About To Change, Trump Volatility Will Return: BAML

With polls showing Presidential candidate Donald Trump creeping ever closer to rival Hillary Clinton, who appears to be taking a defensive wait out the clock keep head down strategy, a Bank of America Merrill Lynch report says Clinton's lead will continue to narrow. In fact, there will come a point for market where political concern, benign for most of the summer, will revert to volatility. This won't look pretty for risk parity strategies, the report projects, breaking the calm during a relatively strong year for the strategy.

Risk parity - Markets are pricing in perfection, a Clinton victory with Republican control of Congress
Last Friday's sharp loss for the risk parity strategy, a rarity in a world of calm, is not a one off event. For those who watch algorithmic market environments, get ready because the short volatility environment is likely to give way to political concern before the election.

The bank report didn't address algorithmic market environments but did note an NBC News poll out Tuesday that noted the new and improved Trump chipping away at Clinton's assumed insurmountable lead. After a series of historic gaffes and a change in campaign management, Trump closed the gap by two points overall. With Clinton still leading 48% to 42% -- some polls even show a closer gap -- and yet the prediction markets pointing to an overwhelming 88% chance of the corporate-backed Clinton winning, BAML's FX and Global Rates Strategist David Woo likes the mean reversion trade.

"History tells us to expect Clinton’s lead to narrow and volatility to rise in the final stretch of the elections," Woo writes in an August 26 Cause and Effect report titled "Pricing in a perfect gridlock."


This content is exclusively for paying members. Access all of our content on including years of timeless investment news and in depth analysis for only a few dollars a month by signing up here while also supporting quality content and journalism, or learn more about our premium content here

If you are subscribed and having an account error please clear cache and then cookies if that does not work email support@valuewalk.com and we will get back to you as quick as humanly possible

Saved Articles

Are you a smart investor? Join tens of thousands of sophisticated investor reading our authoritative free newsletter

* indicates required

Congrats! Are you a smart person?

We have an exclusive targeted for being a sophisticated and loyal reader.

Sign up for ValueWalkPremium today and get our exclusive content for 35% off.

Use coupon code vip19 or click on the button below

Limited time offer only ENDS 11/30/2019 or after next 25 20 subscribers take advantage whichever comes first – please do not share this discount with others