Trump Refusal... Wall Street Bets on Volatility Amid 'US Election Uncertainty'

Increase in VIX-Based Investments... Uncertainty Expected to Expand from November Election through December
Volatility Reflected Across Markets Including US Treasuries, Gold, and Currencies

[Image source=AP Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] Wall Street investors in the United States are betting on volatility ahead of the presidential election scheduled for November. With the possibility emerging that President Donald Trump may not concede the election results, the market is dominated by the outlook that market uncertainty will intensify beyond election day through the end of this year.

The Wall Street Journal (WSJ) reported on the 27th (local time) that "from stocks to currencies, bets are being placed on what could be the most volatile U.S. election in history," adding, "this goes beyond the usual Wall Street trading seen before elections." Futures and options markets are operating on the assumption that the election results will be ambiguous, and U.S. Treasury bonds and gold are expected to see historically high levels of trading this November.

A notable feature is the increase in investments based on the Volatility Index (VIX). According to financial information provider FactSet, the October-expiring VIX futures index stood at 32.23, rising to 33.68 in November when the election takes place. The indices for December and January next year slightly decreased to 32.03 and 31.03, respectively, but this differs from past elections where sharp declines were observed. Looking only at the November and December indices, there is a trend of rising values as the election approaches. According to the Chicago Board Options Exchange (CBOE), the November and December indices released at the end of August were 30.30 and 29.43, respectively.

The VIX is an indicator listed on the U.S. CBOE that reflects the market's investment expectations for the S&P 500 index options' volatility over the next 30 days. Entering into futures contracts linked to this index provides volatility hedging, meaning that as the index rises, the corresponding futures trade at higher prices.

Marvin Lo, Senior Global Macro Strategist at State Street, pointed to the December this year and January next year VIX futures indices, describing the situation as "somewhat abnormal." WSJ explained, "VIX futures prices are rising through the end of this year and less so in early next year," adding, "this is a sign that investors fear the turmoil expected to continue through December."

A similar pattern is emerging in the currency markets. Currency traders are preparing call and put options considering the possibility of both President Trump and Democratic candidate Joe Biden winning. Options trading is also occurring on currencies expected to move significantly depending on the election day results, such as the Russian ruble and Brazilian real. According to Barclays, if President Trump wins, the ruble is expected to appreciate by 1.13% against the dollar, while if former Vice President Biden wins, it is expected to decline by 0.83%. The real is estimated to rise by 1.06% and fall by 1.59%, respectively.

Mike De Pass, Global Head of Fixed Income Trading at Citadel Securities, told WSJ, "(The election) is being priced as one of the most volatile events in history." Mona Mohayan, Senior U.S. Investment Strategist at Allianz Global Investors, said, "We will adopt a somewhat more defensive stance during the election period and for several weeks afterward until uncertainty is resolved."