Investors prepare for volatility as US heads to the polls

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Investors held off making big bets and girded for volatility as Americans headed to the polls in one of the most significant elections in recent memory, with sweeping implications for global markets.

The US dollar weakened on Tuesday, down 0.2 per cent against a basket of its rivals, as polls suggested a tight presidential race and some investors unwound their bets on a Trump victory.

The Ice BofAML Move index, a keenly watched gauge of investors’ expectations of future volatility in US Treasuries, hit its highest in more than a year as a mixture of political and interest rate uncertainty unsettles the $27tn market.

“There is a hyped-up sense of anticipation as we await the results,” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management. “We all know how much is at stake on this election outcome, but until the polls close we won’t know which way to jump.”

Futures trading pointed to small gains for equities at the open in New York, with the S&P 500 set to open 0.2 per cent higher and the Nasdaq 100 up 0.3 per cent.

Yields on US government debt were flat at 4.31 per cent on Tuesday, having risen sharply in the past month in part on expectations that a Trump win would be inflationary for the US economy.

Investors are anxious that there might not be clarity on the winner of the election running into a critical couple of days for global markets, with interest rate-setting decisions from both the Federal Reserve and Bank of England on Thursday.

William Vaughan, associate portfolio manager at Brandywine Global Investment Management, said Treasury markets had “calmed” for now, after a sell-off on Friday and rebound on Monday.

But the potential for an unclear result by the Fed meeting contributed “significant uncertainty” said Vaughan, highlighting the four-day wait until AP made its call on the winner of the 2020 election.

Analysts at UBS said that levels implied by options on the S&P 500 index suggested the benchmark could swing sharply at the end of the week.

The knife-edge election is being viewed as a potential watershed moment by investors. If the Republican party were to take the White House and emerge with control of both houses of Congress, investors have predicted that a promised mixture of tariffs and tax cuts could feed inflation and put upward pressure on interest rates.

That has led to a rally in the dollar and a rise in Treasuries yields in recent weeks, that partially reversed on Monday after polling showed the race was more of a dead heat.

European stock markets showed modest gains, with the regional benchmark Stoxx 600 index up 0.2 per cent, and the UK’s FTSE 100 0.2 per cent higher.

Elsewhere, UK government bonds continued to drift lower, pushing up the 10-year yield to briefly touch the 4.5 per cent level reached after last week’s Budget fed concerns on government borrowing levels.