Democratic presidential challenger Joe Biden is seven points ahead in national polls and beating the US president in most swing states. However, full results are unlikely on election night due to an expected surge in postal voting because of the pandemic.
“The fact that equities are paying close attention to the election is evident in the sharp kink in the VIX futures curve around the election,” said Marion Laboure, a Deutsche Bank analyst. “Equities have historically gone sideways ahead of the election as investors buy protection in the option space against potential volatility around the election.”
Critics of Trump fear he will use any results delay or disputed votes to challenge the election’s validity with the president last week refusing to commit to a peaceful transition of power if he loses.
“The most unpleasant scenario for the markets in the US presidential election on November 3 would be an unclear outcome,” said Bernd Weidensteiner, economist at Commerzbank.
The court battle that followed the 2000 election between Al Gore and George W Bush did not lead to severe volatility but this time “political chaos would hit markets”, he said. Mr Weidensteiner added that the US dollar in particular would suffer.
Mr Trump’s victory in 2016 caused brief volatility in markets before stocks rallied strongly on hopes of tax cuts and deregulation. The S&P 500 has soared 56 per cent since he was elected but stocks have come off record highs in recent weeks. The resurgence of the pandemic in Europe and the US has dented confidence in the economic recovery.
“While equities tended to perform poorly ahead of past elections, they typically rebounded thereafter,” said Emmanuel Cau of Barclays. “For now, high uncertainty is feeding the demand for safety.”