Investors Surfing The Blue Wave Trade Need A Hedge For Bettting
Plenty can still go awry with the market-calming prospect of a Democratic sweep in next month’s elections. Investors Surfing The Blue Wave Trade Need A Hedge
What Could Possibly Go Wrong?
One trade dominates talk at the moment: “The Blue Wave Plus Vaccine.” With Joe Biden well ahead in the polls, Democratic candidates with their noses ahead in enough states to retake a majority in the Senate, and several vaccine candidates now into the final stages of testing, the bet is on that we should now prepare for a big growth spurt.
Democrats will arrive, and spend money not only to tide people through the pandemic, but to help them rebuild, putting fiscal stimulus back in place for the first time in a generation. With a vaccine at last available, people will have the confidence to go back to work, and to play.
But Lots Could Go Wrong With This. Here Are The Steps That Need To Be Put In Place Before The Vaccinated Blue Wave Comes To Pass:
Biden needs to win enough votes in enough states to win the Electoral College.
This looks a decent bet at present, as anyone who follows the polls will know. Pollsters believe they have corrected the errors from the last election in 2016, when in fact their underestimation of the vote for Donald Trump wasn’t as great as many think.
Further, there is research from Morning Consult that suggests the much-discussed phenomenon of the “shy Trump voter” — where likely supporters were significantly less likely than those of other candidates to admit as much in phone interviews — may only really have existed during the primary campaign of 2015 and 2016, when Trump was running against established Republicans.
In 2020, Morning Consult found that wealthy voters were indeed much less likely to admit to favoring Trump in a phone interview than in the privacy of an online survey; but this was balanced by an only slightly smaller opposite effect among the poorest voters, who were shy about admitting to liking Biden.
That said, the margins are tight in a number of important states. If the race tightens in the next two weeks, Biden could still easily lose the electoral college, even if he wins the popular vote.
We all have to survive election night without a major contest, and the weeks that follow without civic unrest.
This will be an American election night unlike any that have preceded it because of the scale of mail-in voting. States are going to great lengths to make it easier to vote early (even commandeering the Boston Red Sox’s home of Fenway Park as a polling station).
Counting mailed-in and early ballots necessarily takes longer (envelopes need to be opened, signatures need to be checked and so on), and in some states, ballots sent in time that haven’t arrived by election day are still valid.
There is also evidence that those mailing in votes will be disproportionately Democratic. Thus there is a strong possibility of an apparently good showing for the president on election night, followed by a “Blue Shift” as the Democrats steadily overtake him thereafter.
Trading rooms have already worked out the key variables. Some states aren’t allowed to start counting mailed-in votes until election day, including several vital ones: Michigan, Pennsylvania and Wisconsin, the trio of Rust Belt states that delivered the last election to Trump.
Another is New Hampshire, which is a possible Trump pick-up. This makes it unlikely that the election can be called definitively on election night. (A full list of states and their rules on counting mail-ins can be found here.)
But Florida starts counting postal votes once they arrive, meaning that a provisional result should come earlier in the evening than normal. In practice, a clear Biden victory in Florida would render it almost impossible for Trump to win the electoral college.
Any Trump attempt to query the result would be regarded on markets as desperation tactics. So, if the networks announce Florida for Biden, there is a chance that markets will respond almost as they would to a normal election night that features concession and victory speeches in prime time.
North Carolina, another possible Biden pick-up, also counts mail-ins in advance, so if he has won a clear victory in the electoral college it should be obvious on the night.
If Trump were to win Florida, then his chances of victory would be far higher. In this case he would almost certainly be able to mount a plausible challenge if the election were awarded to Biden. A Trump victory in Florida would thus sharply increase the risk of a contested election, and of a second Trump term.
A contested election would be exactly what markets dislike. With two teams of lawyers already well prepared, and a new Supreme Court that appears likely to give the benefit of the doubt to Trump, it could take a long time to clear up; and the risk of civil unrest and violence would be very high.
Markets sailed through the turmoil after the killing of George Floyd earlier this year, just as they had been unscathed after previous major episodes of civil disorder. But unrest during a contested election might well be different.
Democrats Need To Retake The Senate
This is a more tenuous possibility than a Biden victory. The Democrats currently have 47 seats, including allies, and would need 50 to control the Senate, assuming they won the presidency. They seem very likely to lose their current seat in Alabama, and to pick up seats in Arizona, Colorado and Maine.
That would leave them one short. Taking control would likely hinge on winning one of North Carolina (a 59% shot according to the Predictit market) or Iowa (a 58% shot). Democratic control of the Senate is slightly more likely than not; it’s not possible to say any more than that. Also, the Senate is unlikely to be resolved by the end of election night, and this could become a key area of uncertainty.
Should the Republicans hold on to 51 seats, then Mitch McConnell would continue as leader of the Senate, and the experience of the last few weeks makes clear that the chance of a significant shift toward fiscal activism would be dead.
That may be no bad thing, as far as markets are concerned; gridlock, but without the sometimes dangerous unpredictability of Trump, might suit them well. The overall macro position would presumably be much as it is now, dominated by a very dovish Fed, and that has made plenty of investors rich (whatever effect it has had elsewhere).
But it would be a bad thing for anyone who had positioned themselves for a Blue Wave.
Democrats in the Senate need to vote in favor of the Biden agenda.
The Democratic contingent in the Senate is more moderate than the party’s base. Joe Manchin of West Virginia and Kyrsten Sinema of Arizona both represent conservative states and have shown a willingness to rebel in the past. A number of likely new entrants are also distinctly on the moderate wing of the party.
The precedent of Barack Obama’s victory in 2008 shows that power could devolve to these moderates. The plan for the government to offer a “public option” as an alternative to private insurance was dropped from the Affordable Care Act largely because of the opposition of Joe Lieberman, a moderate senator from Connecticut.
The American Recovery and Reinvestment Act, Obama’s attempt at a fiscal stimulus in February 2009 as the world reeled from the Lehman crisis, included only $105.3 billion for infrastructure spending, out of $831 billion in total, after much congressional bargaining. Democrats had a much stronger majority than they are likely to have next year.
The vaccine needs to be approved and distributed, and then people need to take it.
Disquieting news from tests of the various vaccines now under development shows that this isn’t a given. Vaccines normally take more like four or five years to develop, and the stoppages of a number of trials after volunteers fell ill has reminded investors that there is a reason for this.
Distributing vaccines is logistically challenging, and will require deft political handling. Opinion polls find almost as many Americans would “definitely not” take it as definitely would. Further, the vaccine will probably need to be rationed in the first instance. Who should receive it first?
The moment any vaccine receives approval should be great for confidence, both in markets and the population. But there could easily be many months between that moment and the point when economic activity can truly return to normal. This would blunt the hoped-for impact of any new fiscal spending.
All of this needs to happen without prompting dislocations in markets.
If we really do have a Blue Wave followed immediately by a vaccine, the chances are that bond yields will rise, a lot. Our old friend inflation could be back. That could change a lot of calculations.
How to deal with all of these possibilities now? It makes sense to have some exposure to the kind of assets that would do well if everything good comes to pass.
It would probably be great for emerging markets and for U.S. stocks other than the FANGs. There is also some point in looking for assets that would act as diversifiers. Of the main world stock markets, Brazil has the lowest correlation with the U.S. as S&P Global shows
But the overwhelming point is that a bad outcome for the U.S. remains very possible, and bad news for the U.S. tends to be bad news for everywhere else.
Thus it makes sense to go further than diversification in attempts to limit risks. Jean Ergas of Tigress Financial Partners suggests that rather than positioning only for a new “Marshall Plan,” investors should adopt scenario analysis, and make sure that they don’t lose money too grievously in any scenario.
Realistically, that cannot be done by broad diversification, but will instead require paying for hedges, such as put options on the S&P, or VIX options, or maybe gold. If the worst doesn’t come to the worst, buying these hedges will put a dent in gains. But the uncertainty remains so radical that it is the best way to proceed, Ergas says. I think this is good advice.
As election night grows closer, those of us in the U.S. have to acknowledge that it could raise more questions than it answers. It could lack the certainty and drama that normally comes on election night.
Nobody does election night drama better than the British. Winning and losing candidates have to stand next to each other on a platform while the result is read out, and then give speeches.
Here is how the BBC reported on one of the most dramatic moments in recent history, when the then-defense secretary Michael Portillo, who was favorite to be the next leader of the Conservative party, lost his seat in 1997. His Conservative colleagues looked on with ashen-faced horror while across the country Labour crowds rejoiced. And Portillo had no choice but to make a speech.
Meanwhile, to capture the drama and the irony of America’s last election night, try this Saturday Night Live sketch broadcast four days later, where Dave Chappelle and Chris Rock play two black guests at a party in Brooklyn held by a group of white liberals. It’s very funny.
Prediction Markets Bet Against Trump Completing His First Term After COVID-19 Diagnosis
Following reports of United States President Donald Trump’s positive test result for COVID-19, prediction markets have (perhaps predictably) seen a flurry of activity.
One of the more macabre predictions gaining attention is on the centralized PredictIt market run by the Victoria University of Wellington in New Zealand.
Posing the question “Will Donald Trump complete his first term?,” the prediction was originally intended as a measure of the likelihood of the president getting impeached and leaving office.
However, interest has grown following news of the president’s close aide Hope Hicks testing positive for the virus and the president subsequently being tested. Daily volume jumped from a seven-day average of around $6,000, to over $37,000.
A good proportion of this must have been placed on “No” as the “Yes” price went down $0.04 to $0.82.
Following this morning’s news that the president’s test result came back positive, the “Yes” price has come down another $0.04 to $0.78. Less than a week ago, the “Yes” price was at a lofty $0.90.
For clarity, the specific rules of this prediction market state, “Temporary incapacity resulting in the temporary transfer of authority to an acting president shall have no bearing on the outcome of this market.”
With the threat of impeachment no longer hanging over him, this means that predictors are essentially betting on the likelihood of Trump’s death.
As a technically obese man in his seventies, Trump certainly falls into the higher risk category. He and his wife Melania are currently quarantining at the White House, putting election campaigning on hold for now.
Tonight, @FLOTUS and I tested positive for COVID-19. We will begin our quarantine and recovery process immediately. We will get through this TOGETHER!
— Donald J. Trump (@realDonaldTrump) October 2, 2020
Investors Dust Off Trump Trade, This Time Betting He’ll Lose
Traders are reviving a currency pair from four years ago to bet on Donald Trump losing next month’s presidential election.
The trade involves the currencies of Mexico and Russia, the two emerging markets thought to be most affected by Trump’s foreign policy. In 2016 investors were buying the ruble and selling the peso in expectation the Republican candidate would mend relations with Russian President Vladimir Putin and cut trade ties with Mexico after winning the election. This time around, the trade has reversed as Joe Biden gains in the polls.
“Trump is very keen to ingratiate himself with Russia, so what’s good for him is good for Russia,” said Paul McNamara, who oversees $4.5 billion in emerging-market debt as a money manager at GAM (UK) Ltd in London. “Biden looks more likely to go back to a rules-based global trade regime, with Mexico and China potential beneficiaries.”
The peso has rallied more than 6% against the dollar in the past three months, the best performance among major emerging-market currencies, as investors bet that increased stimulus under a Biden presidency will help boost Mexican exports to the U.S. The ruble has slumped 8% in the same period, with markets predicting that a Democrat in the White House will more likely impose harsher sanctions on Russia.
Not everyone is on board. Sergei Strigo, a London-based money manager at Amundi (U.K.) Ltd. says this year’s election is too unpredictable to create any trading opportunities. In 2016 he was buying the Russian currency and selling the peso, but this year he has an overweight position on the Mexican currency, and has used the recent sell-off to add to his ruble overweight. Amundi manages over 40 billion euros ($47 billion) in emerging-market assets.
Other factors are at play. A rally in global oil prices helped the ruble in 2016, while a slump this year has hurt the Russian currency without harming the peso. Meanwhile, interest rate cuts have made ruble bonds less appealing to foreign investors.
The aftermath of the last election is proof that using currencies to predict the outcome is tricky. Back then, the ruble continued to surge into 2017 before crashing as Trump became mired in allegations of Russian meddling in his campaign. Putin said this week that a bipartisan consensus in the U.S. on the need to contain Russia had meant Trump’s presidency wasn’t as beneficial to Russia as expected. The Trump administration imposed or expanded sanctions 46 times on Russia, more than any previous one, he said.
Most analysts and investors still agree that a Biden presidency isn’t likely to mark a big improvement in U.S.-Russia relations. A multitude of new sanctions risks have surfaced since the poisoning of opposition activist Alexey Navalny with Novichok, a banned nerve agent also used on former Russian military officer Sergei Skripal in the U.K. in 2018. The Kremlin has also been criticized for supporting the embattled Belarusian leader Alexander Lukashenko after a disputed election.
“Biden would be more likely to use sanctions with regard to the perceived misbehavior of Russia in the past U.S. elections, the Skripal case, the Belarusian elections and support to Minsk, and the Navalny poisoning,” said Cristian Maggio, head of emerging-markets strategy at TD Securities in London.
Crypto Traders Bet On US Election As FTX Prediction Markets Hit Record Volumes
Cryptocurrency traders are placing last-minute bets on the outcome of the 2020 U.S. presidential election, pushing volume on FTX’s prediction markets to record highs and drawing new users to the crypto derivatives exchange.
* In the first two weeks of October, monthly trading volume for the TRUMP and BIDEN markets eclipsed prior high set in March when the coronavirus public health and economic crisis brought the Trump Administration and prospects of his reelection to the fore of nearly every news cycle, domestic and international.
* Known for its cutting-edge cryptocurrency futures products, FTX has benefited from this non-crypto offering as well. The markets have served as a “surprisingly strong” funnel for new users, CEO Sam Bankman-Fried told CoinDesk in a private message.
* Both markets represent 22% of referral traffic to FTX, according to data from web analytics service Similar Web, the largest share of any FTX referrer, thanks to links and data posted to electionbettingodds.com.
* Though the betting is on the outcome of the U.S. presidential election, anyone who could cast an actual vote for either candidate on Nov. 3 is excluded from the action in FTX’s markets because the exchange’s services are not available in the United States.
* With the election less than three weeks away, the TRUMP market commands nearly double the volume of its counterpart, the BIDEN futures contract.
* Even though volume for each election market is relatively small compared to similar offerings on other betting sites, the market behavior aligns fairly well with larger election prediction markets.
* For example, PredictIt shows a lead for former Vice President Joe Biden ($0.65) over President Donald Trump ($0.40) similar to FTX’s Biden ($0.65) lead over Trump ($0.36).
* Bankman-Fried told CoinDesk he is “looking into” building more of these non-crypto markets in the future. But his team “might need to build out some more support for them” before launching new offerings.
Barclays Sees VIX Plunging To Pre-Covid Level In Clear Biden Win
Wall Street’s fear gauge is poised to tumble to pre-pandemic levels in the aftermath of a clear-cut election victory for Joe Biden even if U.S. stocks decline in its wake, according to Barclays Plc.
In projections more aggressive than the futures market is pricing in, the Cboe Volatility Index will likely drop to “at least” 20 if a win for the Democratic contender is confirmed shortly after the Nov. 3 vote, the bank told clients this week.
While stock traders have turned bullish on the growing likelihood of a Blue Wave, markets remain on high alert for prolonged post-election uncertainty.
The November VIX future, which expires two weeks after the vote, is trading at 29, around current levels of the spot index. A level of 30 implies the S&P 500 Index will move around 9% over the next 30 days, according to analytics service SpotGamma.
“It is important to note that SPX does not have to rally significantly and in fact could even decline; even then, VIX could potentially drop,” strategists led by Maneesh Deshpande wrote in a note.
Even as the S&P 500 Index surged 55% from its March low, traders have sent the cost of protection soaring in one of the most anticipated event risks in decades. Now, fear of a contested election is easing. While the VIX futures curve remains elevated, it’s dropped across the board compared with a month ago. A series of volatility trades that bet on post-election calm have recently lit up the options market too.
Yet for all that, the fear gauge has remained stuck at around 30 for months. Through Tuesday, it had risen for seven sessions in a row, its longest streak since the run-up to the 2016 presidential election.
While demand to hedge election risk and the resurgent virus are pushing the VIX up, it’s also arguably been whipped around by retail investors gorging on call options.
While shorting the November and December VIX futures would be one way to bet on lower post-election volatility, Barclays strategists recommend positioning for a decisive Biden victory through bearish options on the fear gauge. Traders have recently bought put spreads for instance, which can cut costs but also limit gains.
“While it is tempting to decrease the cost using put-spreads or put-ratios, we think it would not be prudent to cut off the tail of a substantial decline in VIX, and hence prefer outright VIX puts,” they wrote.
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