Bloomberg News: 'Giant Risk Event' Makes Hedging a Good Bet in 2020, TD Says

Article by Vivien Lou Chen in Bloomberg News

Traders should brace for heightened volatility in 2020 as the U.S. presidential election becomes one more reason for investors to hedge, according to TD Securities.

The firm calls next year’s vote “a giant risk event,” and expects President Donald Trump to become the first American leader to be impeached by the House while running for re-election. A surge in volatility would shatter the recent market tranquility that’s been driven by signs of a rebounding economy and progress in U.S.-China talks. In a report released Tuesday, TD outlines 10 ways in which its outlook deviates from consensus expectations.

Two of them are by favoring gold and 10-year Treasuries, both on the view the Federal Reserve might ease by 50 basis points in 2020, instead of just over 25 basis points as expected by the market. Treasuries “are an attractive hedge” partly on prospects for further easing, a scenario that might also send the metal higher. While TD bets on a phase-one trade deal between the U.S. and China, it says a complete accord won’t likely be done until after next year.

“Unfortunately, 2020 shows no signs of reprieve from being beaten and battered by structural uncertainty,” said TD strategists including Richard Kelly, James Rossiter, Priya Misra and Mark McCormick. “If anything, an apparent de-escalation from an intense trade war to a cold trade truce only sets the stage for a re-escalation in U.S. politics from the next presidential election.”

While gold may not have so much upside in the short run, TD’s analysis shows that a rally to $1,650 an ounce (from about $1,472 Tuesday) is in the cards for next year as modest global growth assures “a low rate environment and continued Fed monetary accommodation.”

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