Markets in anticipation of the outcome of the U.S. President's election can be more nervous and more volatile, as we can see from the option market. The average volatility for major currency pairs may be more than twice as high as last week.
We may find out who will become President of the United States tonight, but all this will depend on how big the differences in results between the candidates will be. The smaller the difference, the greater the uncertainty, which may take many more days, not to mention the possibility of contesting the election results. Therefore, it is best for the markets if the polls are confirmed and Joe Biden wins with an obvious advantage.
According to the U.S. Elections Project at the University of Florida, nearly 100 million Americans have already voted, and the increase in the number of votes by mail has raised concerns that it may take a lot of time to learn about the election results as more ballots are processed by mail than usual. President Donald Trump recently threatened to take legal steps to block counting of ballots if they arrive after election day.
For investors, in the short term, it will be crucial how quickly the new stimulus package for the American economy will be implemented. It was supposed to be introduced even before the elections, but the lack of agreement between the Democrats and the Republicans was so great that it could not be put to a vote. Democrats are pushing for a $2.2 trillion stimulus package and Biden's campaign includes extra money for families, cancellation of at least $10,000 per person of federal student loans and an increase in monthly social payments of $200 per month.
Analysts from TD Securities estimate that S&P 500 could increase by 3% and bond yields will fall if Joe Biden wins the election and his party wins 51 seats in the Senate. However, the unclear outcome of the election may result in more serious consequences on this day, and the S&P 500 index may fall by as much as 5%.
For the currency market, the volatility may increase about twofold in relation to recent exchange rate changes, according to data from the currency options market. Hence, the EUR/USD exchange rate volatility may increase up to 120-150 pips. The USD/JPY exchange rate may fluctuate around 120-130 pips. Some of the currency pairs are additionally located at potentially significant support or resistance points, such as EUR/USD, GBP/USD or USD/CHF, and one-time volatility may then contribute to more serious consequences in the future.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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