Investors Hedging US Election Risk

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Investors Hedging US Election Risk

While our scenario for the global economy remains intact – a strong recovery buoyed by fiscal and monetary support and no major inflation pressures – there are some nascent risks, such as the upcoming US election. Here, it remains unclear which party will command a majority in the Senate. An extreme tail risk is that President Trump loses but refuses to accept the results (claiming voter fraud, declaring himself the winner before all mail-in ballots are counted, etc.), leading to litigation in many states. In this case, we would likely see a replay of the 2000 Florida recount and a Supreme Court decision, possibly involving multiple states and a high degree of uncertainty weighing on markets. However, investors seem to have already significantly hedged this risk, with the November VIX contract at 30.4 (the highest ever for a November contract during a presidential election) and the December contract at 28.9.

 

20200915 Investors Hedging US Election Risk - Web
Source: Bloomberg, Unigestion. Data as at 14 September 2020.

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