Election Volatility Risk May Have Just Shifted to December
(Bloomberg) -- Volatility is falling across asset classes with Joe Biden on the brink of victory over President Donald Trump. But traders aren’t out of the woods yet, as a number of catalysts could reignite price swings, according to strategists.
Even if Biden wins -- and that isn’t certain yet -- there’s still a lot to be resolved. Lawsuits related to the results in key states, the makeup of the Senate which remains in doubt, and the potential for public unrest if the result hinges on contested ballots all have the potential to send volatility higher.
“The market today believes it is a protracted election, not necessarily a contested election,” said RBC Capital Markets derivatives strategist Amy Wu Silverman in a note Wednesday. “If the market genuinely believes we’ve entered an ugly, messy contest I think we will see a pick up in vols.”
The Cboe Volatility Index dropped six points Wednesday and fell below the 30 level for the first time in over a week as results moved in favor of the Democratic candidate. The ICE BofA MOVE Index, which tracks swings in Treasury options, tumbled the most since 2014 and measures of currency and credit volatility also declined.
The current election tally prolongs elevated risk pricing, according to UBS Group AG strategist Stuart Kaiser in a note Wednesday. The potential for a delayed or contested result would slow the VIX from finding a floor and could shift some risk pricing into December, he added.
RBC’s Silverman said she’s seeing a pickup in relative demand for downside protection on exchange traded funds tracking the broader U.S. benchmarks like the S&P 500 and Russell 2000. The volatility futures curve now features a noticeable bump from November to December before trending downward again, she said.
“A spike in volatility would not be surprising, particularly as investors parse strident rhetoric, the timeline for resolution and the impact of judicial challenges along the way,” wrote strategists at Columbia Threadneedle investments in a blog post Wednesday.
©2020 Bloomberg L.P.