Investors Brace For Market Volatility Ahead of U.S. Elections

As the U.S. elections approach, market volatility is becoming the talk of Wall Street. Investors are betting that this election could cause dramatic swings across bonds, currencies, and stocks. Recent spikes in market volatility indicators, such as the Ice BofA Move Index, underscore the intense expectations that traders are placing on the days and weeks ahead.

In October alone, the Move Index shot up nearly 40%, signaling sharp price moves on the horizon.

However, the anticipation is palpable as investors position themselves for a potentially turbulent week. Polls indicate an extremely close race between Republican candidate Donald Trump and Democratic candidate Kamala Harris, adding to market anxiety.

While elections always stir up some market jitters, this year, the stakes feel higher. The potential for volatility is more pronounced than during previous elections. Fears of policy shifts, inflation risks, and international trade tensions are all fueling investors’ bets.

Why U.S. Elections and Market Volatility Are So Closely Linked

For investors, elections mean uncertainty, and uncertainty breeds market volatility. With the U.S. election shaping up to be one of the tightest races in recent memory, financial markets are on edge. The stakes this year extend beyond typical campaign promises and touch on critical economic policies. Investors worry about potential changes in interest rates, trade policies, and even military engagements, all of which could significantly impact markets.

Thus, the 2024 U.S. election and market volatility are going hand in hand.

The News / The Ice BofA Move Index, which tracks volatility in the Treasury market, provides a snapshot of grave concerns after the presidential election.

As this index rises, so do market expectations of sharp swings in bond prices. The index recently hit its highest point in over a year, indicating that investors expect substantial movements in response to the election outcome.

Market Moves Beyond Treasuries Post U.S. Election

The effects of anticipated U.S. election and market volatility are spilling over into the currency and equity markets as well. Many investors are hedging against potential risks by taking positions in foreign exchange markets, where indicators show a rise in expected price movements.

For instance, a CME index that tracks volatility across major currencies has reached its highest point since the early 2023s. Thus, signaling unease among currency traders who fear that a shift in U.S. policy could shake up global exchange rates.

Similarly, the peso, often seen as a barometer for U.S.-Mexico relations, has seen its own volatility index surge to levels not observed since Trump’s first presidency. This spike suggests traders are wary of how a potential change in leadership could impact trade with Mexico. In turn, this could affect the peso. Investors seem particularly concerned about proposed tariffs and other trade policies that might come into play if the political landscape shifts.

The Tight Race Makes the Market More Nervous

E News / The close nature of this election is amplifying fears of the U.S. election and market volatility.

A tight race often means that any slight change in polling or unexpected event can sway investor sentiment drastically. In this election, both candidates have laid out vastly different approaches to the economy, and markets are watching closely to see which vision will prevail.

On the one hand, some investors fear that a Trump victory could bring back inflationary policies, causing yields on Treasury bonds to spike as investors adjust for higher inflation expectations.

For many, the potential inflationary impact of another Trump presidency could mean an aggressive sell-off in bonds. This move would likely lead to sharp price changes in the Treasury market, further fueling the volatility index.

Alternatively, a Harris victory could lead to different economic policies altogether. This could potentially ease some trade tensions but introduce other regulatory changes that might keep markets guessing. Either way, the narrow margin between the two candidates keeps investors on edge, preparing for rapid adjustments no matter the outcome.