JPMorgan On A Long / Short Strategy To Hedge Four Projected Interest Rate Hikes In 2017

By Mark Melin 

The most significant risk for equity markets is higher interest rates, a report from JPMorgan’s North American Quantitative and Derivatives Strategy team says. The April 24 French election and troubles with the Affordable Care Act in Congress, which the bank also sees as major risks, are but icing on the risk management cake that most investors appear to be ignoring. To hedge risk, the bank puts forth a long / short strategy as well as various volatility exposures.

Long / short hedge – JPMorgan notes abrupt change in Fed policy, looking at four rate hikes in 2017

With US volatility strangely low, JPMorgan’s March 15 “Volatility Review” report, authored by Bram Kaplan, Marko Kolanovic and Shawn Quigg, say now might be the time to take advantage.

The low volatility is odd from several perspectives.

First, the US Federal Reserve’s rate hike “came about relatively abruptly, as a series of FOMC committee member speeches shifted market expectations just roughly two weeks ahead of the meeting.” Volatility is by definition driven by surprise, and given the impact that raising interest rates – withdrawing stimulus that market participants at one point were dependent on – combining with an apparent abrupt change in policy, what might really be surprising is the lack of volatility.

JPMorgan economists are predicting four rate hikes in 2017, with an increasingly hawkish Federal Open Market Committee looking for three hikes in 2018. While this risk has yet to be priced into markets, that could change – particularly if it is coupled with political risk.

long / short

long / short

Political risks include French elections and Affordable Care Act passage

There are, of course, political concerns, with developments in France leading the charge.

Even though JPMorgan thinks populist Marine Le Pen doesn’t stand much chance in winning the election this fall, when the final round of presidential polling takes place, the next round could present a shock to the system.

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Disclosure: None.


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