(Bloomberg) -- Get ready for some volatility.
With polls opening nationwide in less than 24 hours, Wall Street is trying to grapple with what different election outcomes would mean for markets across the globe. If options markets are correct, the S&P 500 could move 3.7 percent, or roughly 80 points, the day after the election.
"Implied volatilities surged across asset classes last week as investors grappled with the increasing probability of a Trump presidency," Mandy Xu of Credit Suisse Group AG wrote in a note the day before the election. "S&P 500 Nov 7th vs. 9th options are implying a 3.7 percent one-day move for the election, which if realized, would be the 3rd-largest move on record in the past 70 years."
A range of different assets have betrayed sensitivity to the odds of a Republican victory. The Mexican peso, for instance, surged on the recent news that the FBI is sticking to its prior conclusion that Hillary Clinton's handling of her e-mails as Secretary of State did not involve any criminal action. Other areas to watch are U.S. Treasuries, the U.S. dollar, and emerging-market stocks.
Of course, there is reason to believe that these reactions will be short-lived. While the S&P 500 typically swings 1.5 percent the day after the vote, gains or losses over the first 24 hours predict the market's direction 12 months later less than half the time, according to Bloomberg data.
Investors are predicting the election outcome will outweigh company-specific factors in the immediate term. The spread between one-month implied and realized correlation for the S&P 500 rose to a record high going back to 1996, according to Xu, as the correlation between stocks trended lower during earnings season.
This election-induced jump in implied volatility for the S&P 500 index has also occurred amid a period of relatively calm trading for the benchmark. Over the past decade, one-month realized volatility has been higher almost 90 percent of the time. This has pushed the spread between implied and realized volatility to historically stretched levels.
However, the sharp retreat in the CBOE Volatility Index (or VIX) on Monday morning could restrain the magnitude of any relief rally that is expected to follow a Hillary Clinton presidency, with some of the upside siphoned from the markets ahead of the event as move traders price in a win for the Democratic nominee.
To contact the authors of this story: Julie Verhage in New York at jverhage2@bloomberg.net, Luke Kawa in New York at lkawa@bloomberg.net.
To contact the editor responsible for this story: Joe Weisenthal at jweisenthal@bloomberg.net, Isobel Finkel
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
