NEW YORK (Reuters) – Expectations for fluctuations in the market soar as investors face on Tuesday redundancies from the U.S. Senate in Georgia, which will determine which party controls Congress amid a resurgence in coronavirus cases.
The Cboe Volatility Index, known as Wall Street’s “anxiety meter”, recorded its highest close since Nov. 5 at 26.97 on Monday, while the largest one-day gain since late October was posted.
The VIX futures curve, which reflects long-term expectations for market volatility, has also reversed for the first time since early November. A reversal of the curve suggests that investors view the short-term outlook as more uncertain than the longer-term outlook.
If one of the incumbents, Senators Kelly Loeffler and David Perdue, wins in Georgia, the Republicans will retain control of the Senate. But victories by challengers Raphael Warnock and Jon Ossoff would give control of the Senate – and Congress – to the Democratic party via a tiebreak from elected Vice President Kamala Harris.
While a ‘blue swing’ from Congress could usher in 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 policy agenda, including more business regulation and higher taxes. That prospect has troubled some investors on Wall Street.
“The blue sweep creates a number of policy implications that need to be addressed,” said Arnim Holzer, macro and correlation defense strategist at EAB Investment Group. “Those two dumbbells keep the volume high.”
In general, implied volatility – the measure of expected market movements embedded in option prices – has jumped far ahead of realized volatility or actual stock movements.
According to data from Susquehanna Financial Group, the gap between implied and realized volatility is near the highest level in two years for the SPDR S&P 500 Trust, which tracks the US benchmark index.
The gap is equally wide for several US exchange-traded funds in technology and health care, sectors seen as prime targets for tighter regulation in a Democratic Congress.
Christopher Murphy, co-head of Susquehanna’s derivatives strategy, expects implied volatility to ease shortly after the run-offs in Georgia, as well as after the presidential election.
But this time around, concerns about the resurgence of COVID-19 could keep volatility high even after the run-off, said Amy Wu Silverman, equity derivatives strategist at RBC Capital Markets.
“A blue sweep would certainly impact the market, but I don’t see the current volatility specifically related to an administrative change,” she wrote in an email to Reuters.
Reporting by April Joyner; Editing by Lincoln Feast.