NEW YORK (Reuters) – Expectations of market fluctuations are rising as investors face the second round of the Senate in Georgia on Tuesday, which will determine which party controls Congress amid a resurgence of coronavirus cases .
The Cboe Volatility Index, known as Wall Street’s “fear meter”, reached its highest closing level since November 5, at 26.97, on Monday, while recording its biggest gain in one day since the end of October.
The VIX futures curve, which reflects long-term expectations for market volatility, has also been reversed for the first time since the beginning of November. A reversal of the curve suggests that investors see short-term prospects as more uncertain than long-term ones.
If any of the candidates, Senators Kelly Loeffler and David Perdue, win in Georgia, the Republicans will retain control of the Senate. But the victories of opponents Raphael Warnock and Jon Ossoff would give control of the Senate – and Congress – to the Democratic Party through a tiebreak vote for Vice President-elect Kamala Harris.
While a “blue sweep” of Congress may usher in greater fiscal stimulus to help the economy ravaged by coronavirus, it can also pave the way for President-elect Joe Biden to push a more aggressive political agenda, including greater corporate regulation and higher taxes. This prospect has worried some Wall Street investors.
“The ‘blue sweep’ creates some policy implications that need to be addressed,” said Arnim Holzer, macro defense and correlation strategist at EAB Investment Group. “These two bars are keeping the volume high.”
Overall, the implied volatility – the measure of the predicted market movements embedded in option prices – has jumped far ahead of realized volatility, or actual stock movements.
According to data from the Susquehanna Financial Group, the difference between implied and realized volatility is close to its highest level in two years for the SPDR S&P 500 Trust, which tracks the US benchmark stock index.
The gap is equally large for a number of US funds traded on a technology and health exchange, sectors seen as the main targets for stricter regulation in the Democratic Congress.
Christopher Murphy, Susquehanna’s co-director of derivatives strategy, predicts that implied volatility will decrease shortly after Georgia’s second round, as it did after the presidential election.
However, this time around, concerns about the resurgence of COVID-19 may keep volatility high even after the second round, said Amy Wu Silverman, 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 as having anything to do specifically with a change in management,” she wrote by email to Reuters.
April Joyner reporting; Lincoln Feast edition.