NEW YORK (Reuters) – Expectations of market fluctuations are rising as investors face US Senate eliminations in Georgia on Tuesday, which will determine which party controls Congress amid a resurgence of coronavirus cases.
The Cboe Volatility Index, known as the “gauge of fear” on Wall Street, recorded its highest closing level since November 5, at 26.97, while recording the biggest one-day gain since the end of October. .
The VIX futures curve, which reflects longer-term expectations for market volatility, also reversed for the first time since early November. A reversal of the curve suggests that investors consider the short-term outlook to be more uncertain than the long-term outlook.
If any of the incumbents, Senators Kelly Loeffler and David Perdue, win in Georgia, Republicans will retain control of the Senate. But the victories of provocateurs Raphael Warnock and Jon Ossoff would give control of the Senate – and Congress – to the Democratic Party through a tie vote from elected Vice President Kamala Harris.
While a “blue explosion” of Congress could introduce a greater fiscal stimulus to help the coronavirus-ravaged economy, it could also pave the way for President-elect Joe Biden to promote a more aggressive political agenda, including greater corporate regulation and higher taxes. . This outlook has troubled some Wall Street investors.
“The ‘blue sweep’ creates some political implications that need to be addressed,” said Arnim Holzer, macro defense and correlation strategist at EAB Investment Group. “The two balls are held high.”
In general, the implied volatility – the measure of anticipated market movements embedded in option prices – jumped well ahead of actual volatility or actual stock movements.
According to data from the Susquehanna Financial Group, the gap between default and realized volatility is close to the highest level in the last two years for the SPDR S&P 500 Trust, which tracks the US benchmark.
The gap is equally wide for more US-listed funds in technology and healthcare, sectors seen as key targets for stricter regulation in a Democratic Congress.
Christopher Murphy, co-head of Susquehanna’s derivatives strategy, anticipates that default volatility will decline shortly after Georgia’s eliminations, as it did after the presidential election.
However, this time, concerns about the reappearance of COVID-19 may keep volatility high even after the leak, said Amy Wu Silverman, chief financial strategist at RBC Capital Markets.
“A ‘blue broom’ would certainly have implications for the market, but I do not see that the current volatility is specifically related to a change in administration,” she wrote in an email to Reuters.
April Joyner’s Report; Edited by Lincoln Feast.