Goldman Warns: Election Delay May Spike Market Volatility

Key Takeaway

• Goldman Sachs warns of potential market volatility due to a delayed 2020 election result between Biden and Trump, not priced in by investors.
• S&P 500 Index options show little change in implied volatility for November, underestimating election outcome risks.
• Goldman suggests owning November VIX contracts to hedge against the forecasted post-election uncertainty extending into mid-December.

Election Uncertainty Fuels Market Volatility

Goldman Sachs Group Inc. has highlighted a significant risk that traders might be overlooking as the U.S. presidential campaign heats up: the possibility of no clear winner on election night. With President Joe Biden and former President Donald Trump neck-and-neck in national polls, the uncertainty could lead to a surge in market volatility. David Kostin, Goldman's chief US equity strategist, emphasized the likelihood of recounts and the market's underestimation of this scenario. Despite the close race, S&P 500 Index options and the VIX futures curve show little anticipation of post-election volatility, suggesting investors may be caught off-guard by a prolonged decision process.

FX Markets React to Election Prospects

The foreign exchange markets are starting to price in the risks associated with the U.S. election, particularly concerning the Chinese offshore yuan. The spread between six- and three-month implied volatility for the yuan has significantly increased, indicating traders are bracing for potential volatility stemming from a Trump victory and the associated trade implications. Citigroup Inc.'s chief China economist, Xiangrong Yu, pointed out the severe impact of Trump's proposed 60% tariffs on Chinese imports, which could push the yuan to weaken dramatically. The Mexican peso and the euro are also seeing heightened volatility, reflecting broader concerns over trade tensions and tariffs.

Trade Tensions and Currency Impacts

The threat of renewed tariffs under a Trump administration has stirred market concerns, affecting not just the Chinese yuan but also the Mexican peso and the euro. The prospect of a 10% levy on all foreign imports and specific tariffs targeting China and Europe has led to increased market volatility. European Central Bank President Christine Lagarde has warned of the need for Europe to prepare for potential tariffs, highlighting the global implications of the U.S. election. JPMorgan & Chase Co.'s co-head of global FX strategy, Meera Chandan, recommends reducing dollar long positions, underscoring the ongoing concerns over trade tensions.

Street Views

• David Kostin, Goldman Sachs (Neutral on the market volatility related to the presidential election):

  "It’s entirely plausible that Americans won’t know who their next president is on Nov. 5 or the days to come, considering President Joe Biden and former president Donald Trump are roughly even in national polls. And a prolonged decision could spur a surge in market volatility that investors aren’t pricing in... I think there’s going to be some recounts."