Merchants braced for volatility and quantity as US election evening nears

Bankers, merchants and traders are bracing themselves for a protracted stint of excessive volumes and elevated volatility, notably in bond and forex markets, forward of Tuesday’s US presidential election.

With markets already pricing in doubtlessly giant swings throughout a number of asset courses, Wall Avenue banks have been making ready effectively upfront — with some pausing software program updates and reserving downtown lodge rooms for suburb-dwelling merchants, to ensure they’re able to deal with any surprising strikes on election evening or all through the remainder of the week.

“I can be glued to my display screen,” stated Vikram Prasad, Citi’s international head of credit score buying and selling. “We’re actually co-ordinating throughout the complete organisation.”

The early focus because the polls shut can be on bond and forex markets, which commerce via the evening. Whereas inventory futures can even be transferring, they sometimes grow to be extra dependable indicators within the morning, earlier than the New York market opens.

Market individuals additionally flagged {that a} huge distinction between the presidential election 4 years in the past and this week’s contest was the larger depth of the cryptocurrency market, which is open 24 hours a day.

Election day comes as gauges of anticipated volatility throughout the Treasury and currencies markets have risen in latest weeks. The ICE BofA Transfer index, a intently watched measure of future strikes within the US authorities bond market, rose two-fifths in October, whereas a CME index of implied volatility throughout a bunch of developed market currencies final week hit its highest degree since early final 12 months.

The potential for spikes in buying and selling exercise imply banks and different corporations have made logistical preparations forward of time. At Goldman Sachs, Richard Chambers stated his repo and quick macro buying and selling groups would intention to take a couple of hours’ break early within the night, earlier than returning to their desks as polls near work in tandem with Asia-based groups.

“We would like everybody to attempt to get some downtime, then be able to activate their engines for the lengthy haul late Tuesday night. What we realized from earlier elections, is that key info can disseminate round midnight to 2am,” he stated.

“How rapidly we return to the traditional course of enterprise can be a operate of the chance of the election being contested or non-contested,” Chambers added. “However we count on to see larger than regular volumes on the Tuesday evening and the Wednesday, and most definitely following via to the tip of the week as new info comes via.”

The day after the election, shares will come to the fore, with markets pricing a possible swing of plus or minus 2.2 per cent within the S&P 500, in line with choices information final week on the Cboe.

Buying and selling volumes aren’t anticipated to hit the report ranges seen on the top of the mid-pandemic meme inventory mania, however corporations are nonetheless taking steps to minimise the chance of disruption.

“I don’t assume the election goes to emphasize out the system . . . the markets are resilient and the infrastructure is there,” stated Patrick Murphy, a associate at market making agency GTS. Nonetheless, he stated, many corporations would put a short lived freeze on non-essential modifications equivalent to software program updates that will carry an incremental likelihood of inflicting issues.

Market makers have additionally been slicing again their danger exposures in order that they have as a lot liquidity as potential to facilitate trades subsequent week.

“Going into an occasion like this one, whichever method you’re leaning, there’s a excessive diploma of uncertainty for positive,” stated Citi’s Prasad. “We’ve spent quite a lot of time cleansing up our stock and our personal positions to be able to be as impartial as potential to method the occasion from the angle of offering that intermediation.”

Some traders with a longer-term focus can be attempting to withstand the urge to get too caught up in in a single day vicissitudes.

“The preliminary response is sort of at all times a head pretend,” stated Ed Al-Hussainy, senior charges analyst at Columbia Threadneedle Investments. “Fairness markets collapsed after Trump was elected [in 2016]. That lasted a day after which they rallied.”

“The method that I prefer to push is: ‘don’t attempt to get that preliminary transfer proper’. It occurs too quick.”

John Schlegel, JPMorgan Chase’s head of positioning intelligence, stated most of the financial institution’s prime brokerage purchasers had been scaling again a few of their bets to mirror the uncertainty.

“Up to now couple of weeks there was a discount in a number of the Trump trades [that had already made some profits] in addition to total taking off danger or including to some hedges . . . which is per prior elections,” he stated.

Tom di Galoma, head of fastened earnings at Curvature Securities, stated election evening was “normally a reasonably unstable evening as polls begin to are available in . . . [but] this might string out for 3 to 5 extra days”.

Including to this week’s busy schedule, merchants might want to quickly flip their consideration to the Federal Reserve’s subsequent financial coverage resolution on Thursday, when the central financial institution is extensively anticipated to announce a second consecutive rate of interest reduce.

Nonetheless, merchants famous that huge occasions just like the election are what they prepare for on a regular basis and eagerly anticipate.

“Being a dealer in occasions of excessive volatility and large market transferring occasions incentivises extra pronounced shopper exercise and larger buying and selling alternative units,” stated Goldman’s Chambers. “That is what merchants in our seat reside for.”