"TACO trading" continues to dominate the market
Despite facing multiple uncertainties such as trade wars, disagreements within the Federal Reserve, and geopolitical crises, the volatility indicators have decreased. Bloomberg pointed out that the "TACO trade" effectively suppressed stock volatility, especially under the influence of Trump's trade remarks and the situation in the Middle East. The market's expectations regarding the political situation have receded, leading to a decline in risk premiums, a normalization of the volatility index, and a sell-off in short-term volatility bonds
Despite various headlines bombarding the market, including trade war headlines (some deals, some delays), Federal Reserve divergence headlines (Waller vs. Powell), and geopolitical crises (Israel-Hamas conflict), the volatility indicators representing global macro uncertainty and geopolitical uncertainty have decreased this week.
Bloomberg believes that the "TACO trade" continues to suppress stock volatility:
U.S. President Donald Trump first escalated trade rhetoric and then eased tensions at the last moment. This strategy worked when the EU and China tariff decisions were overturned in May, and it seems to have also suppressed the market's reaction to the Israel-Hamas conflict. Despite the headlines from the Middle East keeping uncertainty high, market volatility remains controlled, indicating that traders expect the political situation to stabilize again. The decline in risk premiums and the normalization of the volatility index (VIX) levels have stimulated the sell-off of short-term volatility bonds.
