(Bloomberg) -- Investors made the 2020 presidential elections the most-expensive event to hedge in history. In less than a week, they’ve discovered there’s a lot more than just the vote to worry about.
From President Donald Trump’s coronavirus diagnosis to his tweet announcing an end to stimulus talks and the House threatening to breakup tech giants, surprises keep landing on Wall Street -- and it’s putting traders on edge.
The Cboe Volatility Index, a measure of expected stock swings known as the VIX, has risen for six straight sessions and was flirting with a seventh on Wednesday. A similar gauge for U.S. Treasuries just surged after weeks of calm. The S&P 500 has posted a dozen moves of more than 1% in the past month, yet the benchmark has gone nowhere.
America’s main equity index jumped again as trading began in New York, the latest reversal after it closed Tuesday with a 1.4% drop.
“We are in the final run-in to the election and uncertainty is high,” said Kit Juckes, chief FX strategist at Societe Generale SA. “There are just too many things that can happen that can keep the market on edge.”
The catalyst for U.S. equity futures on Wednesday appeared to be hints from Trump that he still wants some kind of stimulus, underscoring how markets are seeking fiscal support above all else. The president tweeted his support for Congress to approve $25 billion to help the airlines and another $135 billion for small businesses.
That glimmer of hope may be enough to engineer a small stock bounce, but it seems unlikely to reignite a rally. A gauge of U.S. economic surprises is now firmly trending down and companies from American Airlines Group Inc. to Walt Disney Co. have announced plans to lay off thousands of workers.
Oxford Economics described the decision to call off stimulus talks as a “watershed moment” that leaves households, businesses and state and local governments increasingly at risk.
“President Trump creates much of the volatility and is faced with a very difficult re-election prospect,” said Sebastien Galy, a macro strategist at Nordea Investment Funds. “His unpredictability will keep the market volatile.”
The explosion in implied bond volatility may be most telling. After Trump’s stimulus tweet, the ICE BofA MOVE Index jumped 18 points on Tuesday, the biggest increase since the height of the market turmoil in March.
“Now that the chances of a fiscal stimulus ahead of the elections appear uncertain, the case for a steepening of the UST curve in the near-term looks even weaker,” a Unicredit Bank AG team including strategist Chiara Cremonesi wrote in a note. There is potential for “further bull-flattening in the near-term,” they said.
A House panel’s proposal for tough new antitrust reforms aimed at curtailing the power of giant tech companies was yet another shock to the system, and added to pressure on the Nasdaq 100 Index after the close on Tuesday.
The confused outlook for the sector is well illustrated by flows in and out of the largest exchange-traded fund tracking the Nasdaq. Almost $1.9 billion fled the Invesco QQQ Trust ETF on Tuesday. In the past month, there have been seven days of outflows and six inflows which totaled more than $1 billion.
The hope for investors is that this won’t last forever, and that the election at least can deliver some certainty.
“The market is beginning to believe the polls, finally, that Trump is likely to lose the election,” said James McCormick, global head of desk strategy at NatWest Markets. “The latest comments by Trump may not matter much for the market. A Biden victory already implies a large stimulus next year.”
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