US and Brazil to the rescue of volatility - Natixis

René Defossez, Research Analyst at Natixis, explains that a few days ago, volatility in the financial markets was at very low levels, but the political risks in the United States and Brazil have changed the situation.

Key Quotes

“The VIX had been fluctuating for several weeks below 11%, and the V1X had been around 12%. One month implied volatility in EURUSD was no more than 6.7% a week ago. Volatility of swaptions was very low too. However, the political risks in the United States and Brazil––two countries in which the question of the impeachment of the President has been raised–– have changed the situation and reintroduced nervousness to the markets.”

“Investors are wondering in particular, as far as the United States are concerned, about the capacity of the government to implement its economic agenda (especially corporate tax reductions) in such a noxious political context: it’s no coincidence that last Wednesday, the S&P 500 had one of its sharpest one-day falls for a long time. Of course, at the same time, Tnotes behaved very well, and the US rate curve flattened sharply by the top. A priori, the Fed should remain relatively insensitive to this new political context, and should continue its return to normal monetary policy.”