President Donald Trump's unpredictable actions on tariffs, foreign affairs and the economy are creating volatility in futures markets at a time of increased concerns about the stability of investments made in the US.
Trump has roiled global markets by announcing — and sometimes retracting the same day — tariffs on Canada, Mexico, China and other trading partners without offering a clear explanation of what outcome he hopes to achieve. The Chicago Board Options Exchange's VIX volatility index, which uses options trades to track the likelihood of major stock market swings, has nearly doubled since Trump took office and hit a seven-month high last week.
The pace and breadth of Trump's agenda are "surprising even his most ardent supporters" and resulted in markets having "mixed feelings" over his policies, Futures Industry Association president Walt Lukken said on 10 March at the International Futures Industry Conference in Boca Raton, Florida. According to a recent survey, the industry group's members identified tariffs as the top policy that could negatively affect markets, Lukken said.
Trump's oft-stated desire to annex Greenland and Canada and his willingness to allow carmaker Tesla's chief executive, Elon Musk, to exert vast power in his administration without a clear conflict-of-interest policy have helped rattle investor confidence, European exchange Euronext chief executive Stephane Boujnah said on the sidelines of the conference. US assets could start trading at a discount because of concerns over the rule of law and an "oligarch risk" that usually exists in emerging markets, he said. "One of the features of the emerging market is that you invest, you own something, until the guy with gold who is close to the ruler wants it too," Boujnah said.
Traders who in the past might have stayed away from markets during periods of volatility no longer have the "luxury to do that in the world that we live in today", CME Group chief executive Terrence Duffy said. "Globally, it's not going to go away, so it's something we all need to deal with," Duffy said. CME reported record trading volumes for natural gas futures and options in January and February, which company executives have attributed in part to years of growing US energy exports. "As the US continues to both produce and export crude and natural gas at record quantities, putting US physical products on the market, customers are coming to the main market to hedge that exposure," CME commodities global head Derek Sammann said on the sidelines of the conference.
Double-edged sword
Higher volatility can benefit exchanges, trading platforms and traders because their revenue is often tied to trading volumes. But too much volatility in markets can cause some traders to sit on the sidelines, resulting in increased price spreads between buyers and sellers, trading platform Trading Technologies executive vice-president of futures and options Alun Green said. "We're still in a well-established, well-worked volatile market, but I think that there are some areas where people are not quite as willing to go in and take risks," Green said.
Trump's push for an across-the-board cut to regulations and his attempt to wrest control of the independent federal agencies that oversee financial markets could end up causing problems in markets if they eventually result in a market crash, according to some regulators.
"I do fear sometimes when we whipsaw too much, that then things can get deregulated too much, and then we create some amount of risk that we then can't handle," US commodities regulator CFTC member Christy Goldsmith Romero, a Democratic appointee, said.
