Laurent Clavel: Exploring the macroeconomic impact on the cross-asset landscape

The TRADE catches up with Laurent Clavel, global head of multi-asset at AXA Investment Managers, to discuss the impact of geopolitical risks on different asset classes, the impact of elections this year, as well as how volatility alters trading strategies.

Do you expect more volatility due to the significant number of elections taking place in 2024?

Most elections have only a modest impact on financial markets, mostly limited to their local market. In 2024, we expect markets to focus on the US presidential elections, especially as the 2016 precedent (with Donald Trump’s victory) was followed by significant market price action (and most likely reaction). Our research actually shows that even US presidential elections have on average little impact on financial markets. However, because of the expected wide divergence in economic and international policies between the two candidates but also because of significant political polarisation in the US, we do expect a meaningful impact this year.

How does volatility alter trading strategies and are there any trading strategies that you expect to increase or decrease in popularity this year?

Rising volatility is most often associated with a risk-off market episode, with equities down and yields falling, hence long-dated government bonds and the US dollar gaining value. Volatility can also offer a buying opportunity. We are already witnessing an increase in derivative positioning around the US election day and we expect this to keep building up, especially if polls remain tight.

Which asset classes are geopolitical risks having the most impact on?

Commodities, especially oil prices, are usually the most and earliest impacted assets by geopolitical risks. Because most of inflation volatility comes historically from oil prices, this in turn has an impact on bonds. The impact on equities is not as obvious in aggregate and we often witness a late but sudden impact when geopolitical tensions morph from distant risks into much closer and more significant materialisation. Middle Eastern tensions illustrate this stock market short-sightedness with oil prices rising progressively, feeding into bond yields and, later on and more suddenly, affecting stock prices with a spike in volatility. Besides, equity reaction will vary considerably across sectors, first driven by the indirect impact of commodity re-pricing, later on via the potential increase in real rates and rise in volatility and risk aversion. by rising geopolitical risks.