U.S. Election Priced as Worst Event Risk in VIX Futures History

Michael P. Regan, Bloomberg
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Election season has traditionally been a source of volatility in the markets, and this year is no exception. One way investors hedge against this risk is using the CBOE Volatility Index (VIX), which tracks the volatility of the market. The price of futures contracts for September and November are currently significantly below the price of an October contract, indicating the market expects significant volatility that month. Bloomberg analyst Cameron Crise suspects traders are “worried about 2000-style uncertainty,” in reference to the hotly contested election of that year.

The Debt Pandemic

Jeremy Bulow, Carmen Reinhart, Kenneth Rogoff, and Christoph Trebesch, International Monetary Fund
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The Covid-19 pandemic has put many developing and emerging market economies in debt distress. After the pandemic brought a sudden stop to private capital flows, multilateral institutions, like the International Monetary Fund (IMF) and World Bank, stepped in to provide much-needed funding. However, borrowing needs will only rise as the economic damage from Covid-19 mounts; the riskiest period may still lie ahead. Even when the default risk is high, history shows us that countries will keep borrowing until they reach the point of default. Further heightening concern of an impending debt crisis are two trends that began developing prior to the pandemic: private creditors are increasingly claiming outsize shares of repayment in debt restructurings and the length of debt crises is becoming longer and longer. Because of this looming debt crisis, Covid-19 could very well lead to another “lost decade” in development, much like what occurred during the debt crisis of the 1980s. 

The article proposes three practical ideas for how governments and multilateral lenders can make sure new funding benefits the citizens of debtor countries and make debt restructuring more expedient. First is to strengthen transparency on debt data and debt contracts. Second, make realistic economic forecasts that incorporate downside risks. Third, work towards creating new legislation to support orderly sovereign debt restructuring. A generous response from official and private creditors will be required in order to preserve the global trading system and move developing and emerging countries out of debt distress.

As Japan’s Abe Leaves, ‘Abenomics’ Will Remain, for Good or Ill

Ben Dooley and Hikari Hida, New York Times
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With Japanese prime minister Shinzo Abe stepping down from office and the future of a coronavirus-stricken Japanese economy uncertain, Mr. Abe’s namesake “Abenomics” system rests on shaky footing. While the Liberal Democratic Party is unlikely to nominate a successor who would throw out Abenomics, that methodology – cheap and readily available money and increased government spending – has a mixed track record. The former aspect of Mr. Abe’s approach allowed Japanese yen to flood the economy, shaking off decades of stagnation. On the other hand, Japan faces a massive public debt, and structural reforms in the corporate and bureaucratic spheres have fallen short of the mark. Despite an aggressive monetary policy and favorable trade agreements lifting the Japanese economy out of its 2011 doldrums, the Japanese economy had begun contracting even before the coronavirus pandemic, which accelerated its decline. Growth plummeted by an annualized 27.8% in the second quarter, and the recovery package aimed at addressing the country’s woes came with a price tag of about 40% of Japan’s GDP. Even as the pandemic rages on, Japanese leaders are unlikely to significantly rock the boat with the next prime minister, and Abenomics will continue to rule the day.

Fed to tolerate higher inflation in policy shift 

James Politi, Colby Smith, and Martin Arnold, Financial Times 
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At the Jackson Hole monetary policy symposium, held virtually this year, Chair of the Federal Reserve Jay Powell announced a new strategy for US monetary policy. The policy shift will be to keep interest rates low to help support the economy even if inflation rises above the target level of 2%. The Fed will also now base its policy decisions on “assessments of the shortfalls of employment from its maximum level”, instead of on “deviations from its maximum level”. This slight change reflects the central bank’s belief that a robust job market can be sustained without causing a spike in inflation. After deploying massive amounts of monetary stimulus earlier this year, the Fed, as well as other central banks, are looking at what tools they can deploy in a second stage of their response to the pandemic.