Evaluation: Traders’ daring bets on the Biden revenue harbor a market danger
© Reuters. U.S. Democratic Presidential Candidate Joe Biden watches as he speaks to reporters as he exits Nashville International Airport in Nashville following the final debate on the 2020 U.S. Presidential Campaign
By Saqib Iqbal Ahmed and April Joyner
NEW YORK (Reuters) – Less than two weeks before the US presidential election, investors can put too much faith in a decisive victory for Democratic challenger Joe Biden as his lead in opinion polls diminishes.
Market participants have been backing away from bets that would benefit from election volatility for the past few weeks while stacking up in assets that would benefit from a Biden profit, including alternative energy stocks and cannabis stocks.
As Biden’s lead has narrowed in recent days, some market watchers fear that an unexpected victory for President Donald Trump, a Republican, or an uncertain election result could force the kind of violent positioning that took place in 2016 when investors were predominantly in favor of one position were positioned for the Hillary Clinton presidency.
In the betting markets, Trump’s chances of winning the election rose 1 percentage point to 36.3% after Thursday’s debate, but Biden retains a significant lead with a 64.4% chance of winning, according to data from RealClearPolitics.
“To some extent, the markets underestimate the likelihood of a Trump recovery here,” said Karl Schamotta, Cambridge chief global strategist Global payments (NYSE :).
After the election, traders expect the greatest fluctuations in the market for stocks. One of the assets prone to violent movement is the Invesco Solar ETF (P :). The exchange-traded fund is up around 24% last month as investors expect clean energy policies under a Biden administration to bode well for the sector.
Option prices suggest that after the election results are released, ETF stocks could see a one-day movement of up to 11% in either direction, according to calculations by Christopher Murphy, co-head of derivatives strategy at Susquehanna Financial Group.
The tech-heavy Invesco QQQ Trust Series 1 ETF (P 🙂 and the S&P 500 Tracking ETF SPDR S&P 500 ETF Trust (P 🙂 are each primed for about 3% to 4% movement, Murphy said.
An unexpected Trump gain could also hit currencies like the Mexican peso and Russian ruble, while also boosting the ailing US dollar, analysts said.
Utilities, tax-exempt municipal bonds, industrial and material stocks could also be at risk, said Justin Waring, investment strategist at UBS Global Wealth Management.
Yields on government bonds, moving inversely with prices, rose to a four-month high on Friday, a day after Biden and Trump in a closing debate that some observers said were unlikely to affect the re-election of the Incumbent would improve.
Some investors believe that a Biden win could spark higher spending and weigh on bonds.
Some market watchers have also noted that while investors are far more protected against market fluctuations than they were in the 2016 election cycle, over the past two weeks investors have reduced bets on wild market fluctuations.
S&P 500 options, which expire in December, suggest a more subdued level of stock volatility than two weeks ago, suggesting that post-election market turmoil expectations have materialized.
Stock and interest rate options “are a price to pay for Biden to win the presidential election,” said Amy Wu Silverman, equity derivatives strategist at RBC Capital Markets. “You’re pretty complacent, as is the idea of a ‘blue sweep’.”
While market fears of election volatility have eased somewhat, investors have by no means given the all-clear. The Cboe Volatility Index, known as Wall Street’s “fear measure,” is above 28, well above the low-to-mid-teens range it was trading in just prior to the 2016 presidential election.
An uncertain or controversial choice would likely result in even more sustained volatility. The S&P 500 slipped up to 10% in the weeks following the 2000 election before the Supreme Court decided the hotly contested battle between George W. Bush and Al Gore for the presidency.
Such a period of uncertainty could hit the market’s biggest winners, including technology and momentum stocks, which were a major driver of the S&P 500’s rebound, said Joseph Amato, president and chief investment officer for stocks at Neuberger Berman Group PLC.
“If you are in a risky environment because of a competitive election, you are likely to be vulnerable to those stocks that did the best,” Amato said. “Very often in a risk-off scenario, you often sell your big winners first.”