NEW YORK (Reuters) – Market turnaround expectations are rising as investors face U.S. Senate runoffs in Georgia on Tuesday that will determine which party controls Congress, amid a resurgence of coronavirus cases.
The Cboe volatility index, known as Wall Street’s “fear gauge,” hit its highest closing level since Monday, Nov. 5, at 26.97, while recording its biggest gain in ‘one day since the end of October.
The VIX futures curve, which reflects long-term market volatility expectations, has also been reversed for the first time since early November. A reversal of the curve suggests that investors consider short-term prospects more uncertain than long-term ones.
If any of the incumbents, Senators Kelly Loeffler and David Perdue, win in Georgia, Republicans will retain control of the Senate. But the victories of challengers Raphael Warnock and Jon Ossoff would give Senate and Congress control of the Democratic Party by a tiebreaker vote by Vice President-elect Kamala Harris.
While a “blue sweep” of Congress could introduce greater fiscal stimulus to help the coronavirus-ravaged economy, it could also pave the way for President-elect Joe Biden to push for a more aggressive political agenda, including greater corporate regulation and greater taxes. This prospect has worried some Wall Street investors.
“The blue sweep” creates some political implications that need to be addressed, “said Arnim Holzer, a macro defense and correlation strategist at EAB Investment Group.” These two pesos keep the flight high. “
In general, implicit volatility (the measure of expected market movements embedded in option prices) has advanced well above realized volatility or actual stock movements.
According to data from Susquehanna Financial Group, the gap between implied and realized volatility is approaching its two-year high for the SPDR S&P 500 Trust, which tracks the U.S. benchmark stock index.
The gap is equally wide for several publicly traded funds in the U.S. in technology and health care, sectors considered key targets for stricter regulation in the framework of a Democratic Congress.
Christopher Murphy, Susquehanna’s co-head of derivatives strategy, predicts that implied volatility will decline shortly after Georgia’s runoff, as he did after the presidential election.
But this time, concerns about the resurgence of COVID-19 may keep volatility high even after the runoff, said Amy Wu Silverman, an equity derivatives strategist at RBC Capital Markets.
“A‘ blue sweep ’would certainly have implications for the market, but I don’t see the current volatility having to do specifically with a change in management,” he wrote in an email to Reuters.
April Joyner Reports; Lincoln Feast Edition.