TLDR:
- Election Day (Nov 5) approaches with Harris vs Trump race considered too close to call
- Markets show unusually low volatility pre-election, with S&P 500 having best election year start since 1932
- Federal Reserve expected to cut interest rates by quarter point on Thursday
- Options traders across markets reducing risk and preparing for increased volatility
- Sector-specific impacts noted with traders buying into financials/crypto for Trump win, renewables for Harris win
Markets are entering a pivotal week as Americans prepare to vote in the presidential election on Tuesday, November 5, while also awaiting a crucial Federal Reserve interest rate decision on Thursday.
The race between Vice President Kamala Harris and former President Donald Trump remains extremely close in the final days before the vote, creating uncertainty in financial markets. Despite this, October showed surprisingly stable trading patterns, marking the second-least volatile pre-election month in 50 years, according to analysis from Carson Group.
The S&P 500 has demonstrated remarkable strength throughout 2024, posting a 20% gain through October – its strongest start to an election year since 1932, as reported by Bespoke Investment Group. However, in the week before the election, major indices showed signs of hesitation, with the S&P 500 declining 1.37% and the Nasdaq Composite falling 1.5%.
Options traders across various market sectors have begun positioning themselves for potential post-election scenarios. Traders expecting a Trump victory are increasing their exposure to financial and cryptocurrency-related stocks, while those anticipating a Harris win are focusing on renewable energy companies, according to Daniel Kirsch, head of options at Piper Sandler & Co.
The cryptocurrency market has seen particular attention, with crypto stocks pricing in potential moves of almost 10%, according to Morgan Stanley’s trading desk. Meanwhile, renewable energy companies are seeing predicted moves of around 6%.
In the currency markets, volatility indicators have risen sharply. The dollar-yuan currency pair reached record highs in short-term volatility as traders hedge against possible trade policy changes. The Mexican peso’s volatility has climbed to its highest level in more than four years.
The bond market has shown its own signs of pre-election positioning, with traders reducing both long and short positions. Open interest in 10-year note futures has decreased notably since early October as yields have moved higher. Some investors are adding tail-risk hedges for higher rates, suggesting concerns about potential fiscal policy changes after the election.
Federal Reserve policy remains a key focus alongside the election. Markets widely expect the central bank to announce a quarter-percentage-point cut in interest rates at its Thursday meeting, adding another layer of complexity to market dynamics this week.
The equity options market is pricing in a relatively modest 1.7% move for the S&P 500 the day after the election, according to analysis from Barclays Plc. This expected move aligns with historical averages for past elections, despite the heightened attention on this year’s vote.
Binary options trading has increased as investors seek to hedge against multiple potential outcomes. These instruments allow traders to bet on specific combinations of market moves, such as simultaneous changes in currency and stock prices.
Short-term volatility in the euro has reached its highest level since March 2023, reflecting concerns about potential trade policies under either administration. This has particularly affected markets sensitive to international trade relationships.
Earnings season continues to run parallel to these major events, with notable companies including Palantir, Super Micro Computer, Arm, Qualcomm, and Moderna scheduled to report results this week.
The CBOE Volatility Index (VIX) has remained elevated compared to realized market volatility, suggesting traders are paying a premium for protection against potential market swings. The Cboe VVIX Index, which measures the volatility of volatility, has also moved higher.
JPMorgan’s latest survey indicates that many investors are moving to neutral positions ahead of the election, reducing both bullish and bearish bets in an attempt to minimize risk exposure to any unexpected outcomes.
Market strategists note that simply reaching a clear election result, regardless of the winner, could provide stability to markets. Baird market strategist Michael Antonelli has identified an uncertain or disputed outcome as potentially the riskiest scenario for markets.
Stay Ahead of the Market with Benzinga Pro!
Want to trade like a pro? Benzinga Pro gives you the edge you need in today's fast-paced markets. Get real-time news, exclusive insights, and powerful tools trusted by professional traders:
- Breaking market-moving stories before they hit mainstream media
- Live audio squawk for hands-free market updates
- Advanced stock scanner to spot promising trades
- Expert trade ideas and on-demand support
