In this news, we discuss the Vote and virus: volatile markets bring reminder of March turmoil.
LONDON (Reuters) – Equity and currency volatility rose on Wednesday and the cost of sourcing dollars rose, reflecting fears that the U.S. election and the resurgence of the COVID-19 pandemic could tip markets in the kind of chaos endured earlier this year.
A massive sell-off in March wiped out a third of the value of U.S. .SPX stock indexes over a three-week period and the premium for cash dollars hit multi-year highs as the pandemic hit markets and locked markets in savings.
Now, with less than a week before the US presidential election, a resurgence of COVID-19 cases is forcing Germany and France to consider tough new restrictions that will almost certainly hurt Europe’s failing economic recovery.
Ulrich Leuchtmann, head of currency and commodities research at Commerzbank, said a double whammy from the accelerating pandemic and an uncertain election outcome could dramatically increase volatility.
“In the case of a very chaotic American election result, it could even approach or approach the level observed in the spring.”
The concerns have been most strongly reflected in the currency markets, particularly in the implied volatility contracts that traders use to protect their investments against sudden exchange rate swings.
Euro and one-week yen implied volatility against the dollar hit its highest level in nearly seven months EURSWO = FNJPYSWO = FN, nearly doubling from a day ago as maturities now encompass on election day on November 3 and the following day.
The euro was also under pressure in the spot markets, weakening 0.6% against the greenback EUR = EBS, while US and European stocks fell 3% or more .STOXX.SPX.
The election result has a particularly strong resonance for China, which suffered from higher trade tariffs and a hostile backdrop for its tech companies under US President Donald Trump.
A victory for Democratic challenger Joe Biden, who currently leads in opinion polls, would mean more predictable trade policies.
One week offshore Chinese yuan volatility CNHSWO = traded at 10.950, the highest since January 7, 2016.
“We have so much uncertainty ahead of us,” said a trader at a Chinese bank.
GRAPHIC: Currency swaps –
While a Biden win is widely viewed as negative dollar-to-dollar trading markets, where traders outside of the United States source their currency, some investors are starting to hedge their bets.
Three-month Euro-dollar swaps EURCBS3M = ICAP rose to 18.5 basis points, close to a one-month high, reflecting investors’ willingness to pay a higher premium for the dollar.
While central banks are now providing sufficient liquidity support, which is reflected in money market funds and liquidity-laden corporate balance sheets, this week’s market nervousness is not a sign of a looming shortage of dollars.
But with economies under further pressure and European COVID deaths up 40% last week, investors are taking no risks and the VIX .VIX stock volatility gauge is already near its June highs.
“Investors are finding a reason to sell,” said Chris Bailey, strategist at Raymond James, highlighting the risk to growth and the economic recovery of the delicate US stimulus negotiations, of a surprise election result or contested and new lockdown calls.
GRAPHIC: Foreign exchange market volatility –
(This story has been corrected to remove the erroneous reference to three-month euro-dollar swaps reaching 150bp in March, previously in paragraph 15)
Reporting by Saikat Chatterjee, Elizabeth Howcroft, Richard Pace in LONDON, Andrew Galbraith and Winni Zhou in SHANGHAI; Editing by Sujata Rao, Kirsten Donovan
Original © Thomson Reuters