Analysis: No White House result? Wall Street’s ‘fear gauge’ shows less panic

In this news, we discuss the Analysis: No White House result? Wall Street’s ‘fear gauge’ shows less panic.

NEW YORK (Reuters) – As Election Day approached, market participants worried about waking up with an unclear outcome. But with this result achieved, they seem remarkably calm about not knowing the winner of the US presidential race.

Turns out the likelihood of a continued standoff on Capitol Hill is a comfort.

Wall Street’s “fear gauge” fell as US stocks surged on Wednesday, which investors attributed to the virtual certainty of a divided Congress. Republicans seemed likely to retain control of the Senate, reducing the prospect of a Democratic sweep in Washington.

Several analysts had cited a protracted election process – including the possibility of a Supreme Court challenge – as a dire scenario for US stocks. While that risk is not irrelevant, the congressional results removed a lot of uncertainty, investors said. A divided Congress would counterbalance the White House agenda, whether Republican President Donald Trump or Democrat Joe Biden wins the election, they said. In particular, it would reduce the likelihood of corporate tax hikes and increased regulation.

“Whatever the destination of the presidential niche, the market has gained confidence in this trajectory,” said Eric Metz, president and chief investment officer at SpiderRock Advisors.

The Cboe .VIX volatility index fell 6.13 points to 29.42, in line with its biggest one-day decline in more than seven months. Futures on VIX also fell globally, albeit more modestly than the index.

Having the election in the rearview mirror also paved the way for a lower VIX, investors said, as an array of anxieties – including civil unrest after election day – had already been taken into account.

“We don’t see a ‘all clear’ thing, but maybe some of these worst case scenarios are off the table,” said Matt Thompson, managing partner at Thompson Capital Management.

Given recent history, market participants had braced themselves for extreme election-related volatility. In 2016, the VIX jumped overnight after Trump’s surprise victory. However, the VIX fell the next day as US stocks rallied, reversing the course of a late fall in futures.

The VIX looked set for similar declines on Wednesday. Still, it remains well above its long-term average near 20. December Futures on VIX were trading above other listed contracts, suggesting concerns about risk until early 2021, such as resurgence of COVID-19 cases.

“The volatility hasn’t gone away,” said Stacey Gilbert, portfolio manager for derivatives at Glenmede Investment Management.

Even so, with the end of Election Day, a massive risk event has been lifted from the US markets. Investors cited the presidential race as a source of volatility almost a year in advance. Cboe Global Markets CBOE.Z has listed the October and November VIX futures earlier than usual so investors can hedge for the event. VIX futures contracts reflect expectations of volatility for 30 days after expiration.

For much of the year – aside from the March sell-off of U.S. stocks due to coronaviruses – October futures have traded at a premium to other contracts, with investors focusing on l election as a major risk event. As concerns grew that a delayed or contested election result would prolong market volatility, November futures began to trade at higher prices.

More recently, however, concerns about market fluctuations after the election had started to fade. In October, the volume of VIX puts, used to position itself in lower volatility, exceeded the volume of VIX calls, used as a hedge against higher volatility. This pattern continued early Wednesday afternoon.

The potential for extreme market fluctuations is likely to diminish as votes are counted, investors said.

“The big event is out of the bag,” said Michael Purves, managing director of Tallbacken Capital Advisors. “Eventually, things will get a bit normalized.”

Reporting by April Joyner; Editing by Megan Davies and Aurora Ellis

Original © Thomson Reuters

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