By Saqib Iqbal Ahmed
NEW YORK (Reuters) – An unexpected result in Tuesday’s U.S. midterm elections could rattle markets poised for relative calm, options strategists said.
Control of the US Congress is on the line in Tuesday’s midterm elections, with Republicans favored by polls and betting markets to gain control of the House of Representatives and possibly the Senate. With Democrat Joe Biden in the White House, that potential outcome would lead to a divided government, an outcome widely seen as favorable for markets in the long run.
But a surprise victory by Democrats could turn markets upside down, potentially bringing to light concerns over regulation of the tech sector, as well as budget spending that could fuel already-high inflation, participants said. From the market.
Analysts said a calendar full of closely watched macroeconomic events, such as last week’s Federal Reserve meeting and US consumer price data later this week, have left traders less focused. in the normal vote.
With investor election-related coverage comparatively light, “any surprises would likely be exacerbated by the weak markets and relatively high volatility outlook we’re seeing right now,” said Chris Murphy, co-head of derivatives strategy at Susquehanna. InternationalGroup.
The options position implied a 1.5% drop in the S&P 500 the day after the vote if Democrats came out with a better-than-expected result, according to Tom Borgen-Davis, head of equity research at the firm. Optiver options market maker.
A “big Democrat win could be taken negatively for the tech sector just because they are more likely to introduce regulation in the sector, compared to Republicans,” Borgen-Davis said.
That said, options traders do not appear to be poised for fireworks. For example, open puts on the Nasdaq 100-tracking PowerShares QQQ Trust options, generally used for defensive positioning, outnumber calls, generally employed for bullish bets, 1.4 to 1, one of the smallest margins since mid-June, according to Trade Alert Data.
Meanwhile, the Cboe volatility index, known as Wall Street’s fear gauge, fell on Monday to close at a nearly two-month low. The SPX was up 0.96% but is still down 20% on the year.
(Graphic: Waning Fear, https://fingfx.thomsonreuters.com/gfx/mkt/lbvggreoyvq/Pasted%20image%201667848468559.png)
Morgan Stanley strategists, including Mike Wilson, wrote on Monday that a Democratic victory could boost Treasury yields and strengthen the dollar, reflecting the view that more fiscal spending could exacerbate inflation and force the Fed to hike. rates higher than expected.
“Markets could assign a higher probability to further fiscal expansion, with Congress and the Fed effectively pulling in opposite directions on inflation,” the Morgan Stanley analysts wrote.
On the other hand, a sweep by Republicans could increase the chances that Republicans will freeze spending, boosting Treasuries and supporting the latest rally in US stocks, which has failed this month, according to Morgan Stanley.
At the individual stock level, certain names have the potential for heightened election-related volatility, Goldman Sachs strategists said in a note earlier this month.
For example, iHeartMedia Inc Fox Corp, Paramount Global and Meta Platforms Inc’s revenue could potentially get a short-term boost from ad-related spending around the midterms, according to the report.
Meanwhile, shares of tobacco company Philip Morris International Inc could be volatile due to regulatory restrictions, Goldman analysts wrote.
(Reporting by Saqib Iqbal Ahmed in New York; Editing by Ira Iosebashvili and Matthew Lewis)