The volatility market is ready for “too close to the call” leaks in Georgia

Photographer: Colin Douglas Gray / Bloomberg

Investors are not yet ready to leave behind this chaotic year. There is another persistent risk event: the last races of the 2020 elections that spilled over into next year.

Although not as pronounced as last month’s election coverage, futures options and volatility signal increased concern about the potential market turmoil resulting from the January 5 Georgia race results that will determine whether Republicans will hold Senate control.

Prior to the November vote, many considered the democratic approach to the election to be one of the most optimistic results possible for US action. Since then, however, the market has shown that it is comfortable with a potentially divided continuous control of the government – a background that has historically produced strong profits.

“There’s no doubt, if you go from red to blue, you have to price for something that seems less favorable because of markets that like blockages, markets that like the status quo,” said Phil Camporeale, CEO of many-asset solutions for JPMorgan Asset Management.

The focus on the leak – and the demand for turbulence protection coverage – is focused on uncertainty about exactly how investors should position themselves in front of a Joe Biden presidency. He needs the Senate’s democratic scrutiny to execute on an agenda that would boost green energy companies to the detriment of fossil fuel producers, while leading to more economic aid packages and infrastructure spending. However, it could also help increase the corporate tax rate and intensify regulatory control.

“It is impossible to overstate how important these choices are for the size, scale and speed of fiscal, fiscal and regulatory policy in 2021,” Cowen analyst Chris Krueger wrote in a December 21 note.

Fences in place

There are potential winners and losers in both scenarios and it is debatable, which would be a better scenario for the overall long-term stock market. But traders seem to be guarding against the volatility that could erupt in the short term if Georgia’s results cause investors to cram into the perceived beneficiaries of the result and give up perceived losses.

Hedging probably also reflects the concern that even small surprises could create turmoil in a stock market that needs the general public to continue investing after a spectacular run. The S&P 500 rose 65% from its lowest level in March, with an assortment of valuation values ​​at its highest in the last decade or so.

“The idea that fiscal policy and public procurement could matter more than earnings and revenues – it’s a lot like 2020, isn’t it? – it is instinctively uncomfortable and supports volatility above normal, persisting “, wrote Julian Emanual, stock strategist at BTIG brokerage, in a recent note.

Biden shares will have history and will feed, not much