Stocks in U.S. Risk Rough Road as Options Market Flashes Warning
(Bloomberg) -- U.S. stocks hold the bragging rights over Europe when it comes to returns this year. Traders, however, are bracing for the rest of 2021 to be rockier in America.
That’s the signal from the options market, where more volatility is seen this fall in the U.S. than in Europe. Both regions face near-term political and monetary-policy uncertainty, but stretched valuations in America compared with Europe may account for the discrepancy.
Actual volatility over the past 90 days for the S&P 500 Index and the European Stoxx 600 Index is about the same. Yet looking ahead, the expected volatility priced into the options market for the U.S. benchmark over the next three months is higher.
Both the Federal Reserve and the European Central Bank are set to begin tapering emergency asset purchases meant to shore up their economies during the pandemic. The ECB went first on Thursday by announcing that it will slow the pace of its pandemic bond-buying program in the final quarter of 2021.
The move could put pressure on the Fed to make a formal announcement regarding its own plans at the upcoming Sept. 22 policy meeting, since the U.S. has significantly higher inflation and lower unemployment than Europe. A Fed Bank of New York survey showed Monday that consumers expect inflation at 4% over the next three years -- the highest in data back to mid-2013.
Both Europe and the U.S. have upcoming political events which could move equities. Change is headed to Germany, which will hold elections on Sept. 26 to replace outgoing Chancellor Angela Merkel. Her Christian Democratic party, which has been a strong voice of austerity both in Germany and Europe, is polling behind the Social Democratic Party, which could increase fiscal spending if it gains control.
Meanwhile, lawmakers in the U.S. face a deadline sometime between mid-October and mid-November to raise the debt ceiling or risk defaulting, new analysis shows.
While there are some similarities between the risks in both regions, stretched valuations in the U.S. could mean steeper declines in the event of a selloff. The S&P 500 is trading at about 21 times 12-month forward earnings estimates and 2.8 times forward price-to-sales compared with 16 and 1.5, respectively, for the Stoxx 600.
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