[US Election 2024]
It May Take Longer to Outline the President-Elect
Financial Market Volatility Expected to Increase
Investors Prepare in Stock, Forex, and Bond Markets
There is a possibility that the outline of the US president-elect may not be revealed on election day, leading to expectations of significant volatility in the financial markets. Options traders have begun preparing to mitigate widespread risks across the stock, foreign exchange, and bond markets.
According to Bloomberg on the 4th (local time), many short-term currency options traders are betting that volatility in the Chinese yuan, Mexican peso, and European Union (EU) euro will increase under the scenario of former Republican President Donald Trump's administration.
Trump, who announced tariff policies, could cause these currencies to weaken further against the dollar if he wins the election, while if Democratic Vice President Kamala Harris is elected, the dollar could conversely weaken. Bloomberg explained, "As of the end of last week, the one-week volatility of the dollar-yuan currency option reached an all-time high, while the volatility of the euro and peso reached their highest levels in 1 year and 8 months and 4 years, respectively."
Bloomberg also forecasted that the S&P 500 index would move within ±1.7% on the day after the election, the 6th. The volatility of stocks in sectors benefiting from the presidential candidates is expected to be much higher. Morgan Stanley predicted that the cryptocurrency sector, associated with 'pro-Trump' stocks, and the renewable energy sector, linked to 'pro-Harris' stocks, would move by 10% and 6%, respectively.
However, Wall Street analysts expect volatility to decrease after the election, potentially leading to a rally in the US stock market through the end of the year. Charlie McElligott, Cross Asset Strategist at Nomura Securities, said, "If the VIX index, which indicates volatility, falls after the election, funds using 'volatility control' strategies will increase their exposure to stocks again, which will help promote a rally in November and December."
According to economic media CNBC, during the 2020 presidential election, the Dow Jones Industrial Average rose 11.38%, and the S&P 500 and Nasdaq indices increased by 11.48% and 15.48%, respectively, from the election day to the end of the year. However, CNBC added, "Considering the possibility that the results of this election may not be announced until Wednesday morning (the 6th), one should not expect a short-term surge on Wednesday or the following days." MarketWatch analyzed that the longer it takes to announce the election results, the weaker the risk asset preference sentiment may become.
Analysts also expect the election results to bring significant volatility to the bond market. According to a recent survey by JP Morgan, bond traders are reducing both long and short positions in US Treasury bonds ahead of the election. This indicates that bond traders are reducing bets on the victory of a specific candidate due to the extremely close race.
In the Treasury market, if former President Trump enters the White House, it is expected that the fiscal deficit will worsen further, causing the 10-year US Treasury yield to rise sharply. Conversely, if Vice President Harris wins, the yield is expected to rise within a limited range or stabilize, which is the prevailing view.
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