Market Braces for Volatility Ahead of U.S. Elections

As the November U.S. elections loom, traders are gearing up for potential turbulence in the stock market. Vix futures are indicating a significant spike during this period, while concerns are mounting among fund managers, with 16% now identifying the U.S. election as the biggest risk to the market.

Key Takeaways

• Vix futures show a marked increase in volatility expectations around the November elections.
• The percentage of fund managers highlighting the U.S. election as the primary risk to the market has surged from 9% in May to 16% currently.
• Historical patterns suggest heightened market volatility pre-elections, followed by a relief rally post-results.
• The upcoming presidential debate has the potential to shift market focus and elevate volatility.
• Currency markets are closely monitoring candidate responses, which could impact the trajectory of the dollar.

Analysis

The anticipation of U.S. election volatility, as indicated by Vix futures, mirrors investor apprehension over potential policy shifts and market uncertainty. This could result in temporary market instability and a subsequent recovery post-election. Currency markets, particularly the dollar, may witness fluctuations driven by candidate stances, exerting influence on global trade and investment flows. In the long term, the election outcome could redefine economic policies, with implications for sectors such as technology and finance. The impact of the presidential debate on market sentiment is expected to be pivotal, potentially amplifying volatility within a low-liquidity environment.

Did You Know?

• Vix Futures: The CBOE Volatility Index (Vix) forecasts expected stock market volatility over the next 30 days. Vix futures enable traders to speculate on or guard against future Vix movements. A significant spike or "kink" in Vix futures suggests that investors anticipate a period of heightened volatility, often related to uncertainties like elections.
• Relief Rally: This term denotes a sharp upturn in the stock market following a period of uncertainty or negative pressure. In the context of elections, once the results are clear and uncertainty diminishes, investors typically respond positively, leading to a relief rally as confidence in the market's direction is restored.
• Tail Risk: It signifies the possibility of an asset shifting more than three standard deviations from its current price. In the context of this article, the classification of the U.S. election as the primary tail risk indicates that 16% of fund managers believe the election could prompt extreme market movements, significantly impacting their portfolios.