Tags: 2020 Elections | markets | election | volatility | investors | indicators

Some Market Indicators Brace for US Election Volatility

Some Market Indicators Brace for US Election Volatility
(Valiantsin Korznikau/Dreamstime)

Friday, 07 August 2020 10:39 AM

It’s crunch time for traders betting on the prospect of market upheavals around the U.S. presidential vote.

With less than three months until polling day, the commonly-traded options and futures contracts that typically match that timeframe are now firmly in play. But currency and interest-rate bets reflect quite a different view to equities, leaving some wondering which signals to trust.

Positioning in foreign-exchange derivatives suggests that November’s election -- which may be hampered by the ongoing coronavirus pandemic and risks being drawn out -- will be accompanied by a spike in volatility. The U.S. rates market also indicates the possibility of increased turbulence, but equity options paint a more nonchalant picture.

“While media makes a big deal of the election 100 days away, for the markets, three months is the key,” said Marc Chandler, chief strategist at Bannockburn Global. “The election will be messy, and absentee and mail-in votes will take some time to count.”

Here are some market indicators that have been moving that may be worth keeping an eye on in the months ahead:

Uncertain Futures?

Options on currency futures show that the euro-dollar pair is increasingly expected to move away from a spot level near 1.1850 in the month of November, with the spread to similar October options widening to the most this year.

There are many potential drivers, of course, including Europe’s recently agreed stimulus deal and the impasse in America over fiscal issues. But the change in sentiment has also coincided with a significant drop in U.S. President Donald Trump’s election prospects, suggesting some FX traders are articulating uncertainty around polling day. Trump has been losing ground in opinion polls and his chance to remain in the White House was around 42% as of Wednesday, according to forecasting site PredictIt.org, down from a 2020 high of 57% in late February.

A Yen for Safety

Yen traders are also bracing for turbulence come November. The spread between three- and six-month implied volatility in the dollar-yen pair is at its highest level since early April, when the pandemic sent it surging, a sign that traders are more concerned about the near- than medium-term. The Japanese currency may be particularly sensitive to political upheavals, given that investors often look to it for safety in risky environments.

Rates Market Radar

U.S. interest-rate derivatives also proved more jittery this week as the November vote rolled into view for three-month 30-year swaptions, with volatility on that measure jumping by the most in one day since March’s upheaval. That’s put it at a premium to the six-month measure, an uncommon development that underscores the market’s current sensitivity to U.S. political developments.

Stocks More Sanguine

A significant counterpoint to positioning in foreign-exchange and interest rates is in U.S. equities, where traders seem less concerned about November’s ballot. The S&P 500 Index is once again closing in on all-time highs. And the market is signaling a drop in the CBOE volatility index, or VIX, after the election, with futures for November trading at a discount to those for October.

That may be in anticipation of getting the election off of the risk calendar or on the hopes that a coronavirus vaccine will be available by then. Either way, it is at odds with some other markets. And for Deutsche Bank AG strategist Binky Chadha the equity-market pattern is “far out of line” with what happened in the last two elections and could be “too sanguine.”

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It's crunch time for traders betting on the prospect of market upheavals around the U.S. presidential vote.
markets, election, volatility, investors, indicators
Friday, 07 August 2020 10:39 AM
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