Volatility only winner in Trump-Biden showdown


Robert Guy

The unedifying septuagenarian smackdown disguised as a presidential debate dented the odds of an end-of-year rally as quickly as it did the credibility of the American political system.

Confronted with the choice between an unbridled egoist threatening to derail the democratic process if the election doesn’t go his way and a tax-and-spend Beltway insider viewed as a puppet of the radical left, it’s little wonder global markets flipped the switch to “risk-off” mode.

Traders have priced in higher volatility in the fourth quarter, concerned by US political risk.  David Rowe

The firming prospect of a Biden White House emerging from a chaotic and uncertain election seems a fitting coda to a year of gut-churning volatility triggered by a global pandemic that’s claimed more than 1 million lives.

Investors betting the fourth quarter will deliver its usual seasonal bounty — US and Australian stocks have averaged gains of 3.1 per cent and 2 per cent respectively since 2000 — may want to manage their expectations given the numerous landmines peppered between now and the end of this annus horribilus.

The biggest threat is obvious: US political risk.

The odds of President Donald Trump contesting any result that doesn’t return him behind the Resolute desk is elevated and that’s reflected in closely watched gauges of market volatility.

The spot VIX Index — also known as the “fear index” – is trading around 26 points but the futures contracts betray anxiety about the election outcome.

The contract that expires on November 18, about two weeks after election day, is trading at just shy of 33 points. Futures indicate no return to current levels until June.

But it’s not just domestic US politics troubling investors. The uncertain trajectory for the world’s largest economy — amid calls for more stimulus — and increasing geopolitical strains are also risks.

Central to both is the bete noire of both sides of the US political divide: China.

Both Messrs Trump and Biden don’t want to viewed as soft on China so expect a ramping up of anti-Beijing rhetoric.

A likely trigger for some election season patriotic chest-beating will be the meeting of the Communist Party’s elite from October 26-29 to discuss the 14th Five Year Plan and future targets for 2035.

It says a lot about the evolving global balance of power that as both presidential candidates crank up the name-calling and blame-shifting about the degraded state of the US economy, China’s leadership will debate ideas about how to build a nation over the next decade-and-a-half.

More details around Beijing’s plans to fast-track China’s rise as an economic, financial and military peer challenger to the US will be fodder for both candidates eager to play up the China threat.

But it’s not just the growth of China’s economy that should concern the US but also its ascendance as the world’s second-largest financial market.

While Trump boasts about the rise in the US sharemarket, the inconvenient fact is the Shanghai Composite rose 8.4 per cent in the third quarter compared to a 7.6 per cent gain in the S&P 500 Index (with one day to go).

Another risk between now and next year is currency volatility. And China again plays a central role.

COVID-19 cruelled growth in all economies but it has magnified the differences in the pace of recovery among different nations.

Although some argue a spike in volatility will boost the US dollar as a safe-haven play, the greenback has been on the nose given the relatively weaker recovery and policy response compared with Europe and China.

The yuan, which has strengthened 5 per cent against the US dollar since its late-May lows, was boosted by Wednesday’s release of September purchasing manager index data that showed China’s economic recovery continues to gain traction.

The risk for the greenback is if the US election does descend into chaos, providing investors cause to consider whether the US dollar retains the same prestige it used to — just like the inhabitant of the Oval Office.

Robert writes on companies and markets. He is a former New York and Shanghai correspondent, and has worked in Hong Kong. Email Robert at robertguy@afr.com.au

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