US election and global economy


The coronavirus has pushed the international economy into a recession but that is already yesterday’s news. All eyes had lately been on international financial markets, which defied their traditional lock-step movement with the real economy and continued to rise to record levels. The main thrust behind the epic bull-run has been the decision of central banks of all major economies to continue to provide support to the system no matter how long the impact of the pandemic lasts. The US, especially, has literally gone back to its money printing ways which typified its response to the Great Recession about a dozen years ago.
Yet this decoupling of Wall Street from Main Street, awkward as it has been even though it has made Big Money bigger money than at any time in recent memory, now seems to be haunted by the upcoming US presidential election. For, another important market indicator has also been busy reversing its usual trend over the last few weeks. The most credible indicator of volatility in the most important international equity markets, especially the S&P 500, is what is called the cboe VIX or volatility index.
Whenever it rises above a certain level, markets fall because the volatility becomes just too much for any upswing to continue for too long. Yet lately both VIX and S&P rose in tandem, which is against all market principles and historic precedent, and the incredible rise was finally disturbed on Thursday and Friday as markets fell across the board.
There are lessons in this for the whole world. Investors everywhere have made money from this strange and unexpected upswing and some countries, like Pakistan, have found the kind of wind that was needed to get their ship out of the harbour once again when the lockdown was lifted. But let’s not forget that the American presidential election is a very big event that casts a very long shadow. And, as the 2016 election that brought Donald Trump to office demonstrated, it can also induce a lot of volatility in markets. That is not just when markets rise and fall unpredictably and some punters get their fingers burnt, but also when there is just too much risk and volatility in the international system to allow any meaningful negotiations aimed at long-term deals, etc. With Covid-19 still a big problem and economic recovery anywhere still very fragile at best, this only adds to the list of concerns that confront leaders right now.