US election risk collapses as Trump a goner

Via Credit Suisse comes some proof that the recent rally in risk has had nothing whatsoever to do with the scuttlebutt around US stimulus and everything to do with the collapse of Trump’s electoral prospects:

IMPLIED VOLS declined across asset classes last week with the notable exception of rates. US rate vol (CIRVE Index) saw its biggest weekly increase since March, up over 18nms, as a result of the US election risk premium now falling within the 1M tenor.

Not surprisingly, the increase was led by the long-end of the curve, with 1Mx30Y implied vol surging almost 30nms as the probability of a Democratic sweep increased and rate skew steepened to near 1-year high (see pg 18). In contrast, equity, oil, gold, and FX (G7) 1M implied vols all fell last week as the perceived election risk premium declined, with equity vol leading the way (VIX down 2.6 pts; V2X down 4.6 pts). See Exhibit 1.

EQUITY VOL: implied vols collapse; NKY led the decline in global index vol last week, with 1M ATM down almost 5 pts (see pg 8). SPX vols fell by a more modest 2 pts wk/wk, with 1M now trading at 21.1% while realizing 19.6%. Most of the flow have been concentrated on selling index vol, whether through VIX downside puts/put spreads (VIX put volumes outpacing calls by 1.6x over past week), S&P puts with vol knock-outs, or the usual over/underwriting activity. In RV space, the most persistent dislocation remains the richness of Tech vol, with QQQ-SPX vol
spread still screening ~99th percentile high (over past 10 years).

SKEW flattens further to 7-month low: Demand for upside calls picked up last week with the rally, with S&P call skew (3M 10D/40D ratio) surging to a 2-year high (see Exhibit 2). This helped drive skew down to its lowest level since Feb, with 3M 25D skew now in the 37th percentile low over the past year.

TERM STRUCTURE normalizes as election risk falls: S&P implied vols fell across maturities last week, with the most pronounced declines coming around the election tenors. The Dec kink in the term structure (where Dec was the highest point on the curve) disappeared as the risk of contested election fell with Biden’s polling lead widening to double digits. S&P 1M vol, which captures the Nov election, is now the lowest point on the curve (in sharp contrast with the rate vol term structure where 1M is the highest point). The S&P term structure is now upward sloping for the front 6M tenors with Mar’21 vol screening as the highest point on the curve. See Exhibit 3.

EQUITY CORRELATIONS fall on earnings: Implied correlation (1M) fell across sectors last week (led by Tech) in anticipation of earnings, with S&P 1M implied corr down 3.4 pts to 33.5% (see pg 13 for sector breakdown). SPX 6M implied corr fell even more notably, down almost 10 pts to 40%.

In other words, the equity market has told Trump ‘see ya and wouldn’t want to be ya’.

David Llewellyn-Smith

Comments

    • Biden gets in: huge stimulus
      Trump gets in: huge stimulus

      Conclusion: Buy stocks

      The turd in the punchbowl is if the election is contested and it all turns messy. Landslide either way — no dramas

      • True, but it there’s still the complication of the senate and house elections too. If it’s a clean sweep and one party controls all three, either way markets will roar I agree. But it could be that presidential win is clear but senate or house are on opposite sides and will stall everything again. That could make markets wobble.

    • RanganutsMEMBER

      I agree. How many elections have there been over the last 5,6 years where the polls were way off the mark?

      https://luckboxmagazine.com/trends/this-pollster-says-the-polls-are-wrong-trump-will-win/

      Interesting 10 min read on this Pollster’s methodology on why Trump will win. I like the questions they ask, their thinking. It’s all quite logical.

      The question is, if the markets are now factoring in a Biden win, what would occur if Trump was to win? Up, Down? Who knows?

      • PalimpsestMEMBER

        The reasoning in the pollster argument is valid. It’s also interesting to see a factor for Republicans being less inclined to answer polls. The Fivethirtyeight argument is that the ‘undecideds’ have really got an intention, but the trick is to find how that’s trending. Even if trends are away from Trump, there’s still too much time and last ditch options to be really confident about the Presidency. Moreover, unless both houses go to one party, lock up is assured. No one is confident about the Senate outcome.

        • The argument of a systemic bias by voters lying to pollsters as to their voting intention could be real, yes. But I don’t see why it should be accelerating now. Biden was +5 for a long time in the national polls, very steady and he is +10 now. Yes that’s not the Electoral College, but even allowing for gerrymanders in Republican states, all that really says is that if Trump is within 5 points he can muddy it, beyond that the gap is probably too much.

  1. Well this solves a problem for me
    I have a truckload of money on the QLD election, but I overlooked the magnitude of the postal vote and that the outcome may not be decided and thus me paid out before the USA election.
    So just have to wait for the one after ?

  2. I’d be very cautious of betting on trump losing, the polls haven’t been accurate for many years now, there are many trump supporters who won’t admit in public because of being abused
    I haven’t read all of above but I feel equity markets are telling us it’s a trump win
    It’s very brave to say he’s a goner

    IMO I think trump will shock everyone and win

    I’d nearly go as far as saying I’d be shocked if Biden won

      • I know a couple of people who got covid and they were quite sick, I got really sick with really bad flu in Bali 2 years ago for a week I couldn’t move

        I’d have to Q what all these people were dying of really, was it just covid or really people that had other serious conditions
        Someone told me the other day a huge amount of people older than 70 die from flu when they have to existing health issues and covid deaths are much less than the flu. Someone may want to correct me
        Even in AUST truthfully how many people died under 70
        I’m not saying trump is the answer but Biden looks like an absolute numskull
        The DEMS should have put up a better candidate. Couldn’t they find someone better Biden
        I think trump will win on the night then it’ll be Supreme Court fighting mail in ballots for a month or 2
        No idea on the senate, that’s above my pay grade

        Anyway sports bet has Biden at $1.5 and Trump at $3.0 and betting market is normally accurate

        It’ll definitely be an interesting 3 months

      • DEMS lost that ground while ago. It is well known that Dems were against locking the borders down. They called Trump racist when he banned travel from/to China.
        So I am not sure if Joe was in charge that US covid deaths would have been lower.

        This is well known information and most undecided voters will vote Trump as all (except for Fox) MSM are still pushing with blaming Trump 100% as if Joe would have burp as vaccine by last Jan and everyone would have been saved.

        Yes, Trump has to carry fair bit of blame as he was openly against even wearing a mask but I doubt US would have experience lot less casualties in any way.

      • Sigh. BCN just regurgitated (plagiarised) what many of us have been saying for years. That things were and still are way overdue for a correction. He’s so late to the party it ain’t funny.

        And then when he extends his “foresight” to presidential elections and scientific processes, well he just underlines that he’s the latest kook to come down the turnpike.

  3. My personal opinion is that the country is on a brink of some serious violence regardless on the outcome of the election. Trump win – riots, because he stole the election. Biden win – riots, because the radical left will feel emboldened to push their agenda. There is a deep divide, and not along the race or gender lines, it is an economic divide, a philosophical divide.

    Whichever scenario, it can turn ugly fast. US stocks down either way, gold up.

  4. RobotSenseiMEMBER

    If the polls are to be trusted, it’s almost as if people finally aren’t buying the bullsh!t Trump is selling.
    Anyway the polls are open, the mail-ins have started, people are queuing for hours to vote, turnout will not be a problem, Trump is on his last legs and 2021 is going to be an annus horribilis as all those chickens and debts he holds from a previous career come home to roost. Goodbye and good riddance.

  5. Totes BeWokeMEMBER

    Trafalgar polling, the only mob to predict a Trump win in 2016, say Trump will win by a small margin.

    No other polling agencies have any credibility, and frankly, really should be looking for other jobs.

    • Ronin8317MEMBER

      Being right one doesn’t mean you’ll be right forever, and being wrong one doesn’t mean you’ll be wrong forever either.

      It all depends on the turnout, especially amongst the black. Hilary couldn’t get them to come out to vote, and it remains to be seen if Biden/Harris can.

      • It normally comes down to who’s offering the most ‘free sh#t’, Ronin.

        On that basis Biden should win at a canter but there’s a hardcore in the US who hate the Left irrespective (the coast vs middle America), so let’s wait and see.

    • Buddy lightning don’t strike twice. You are forgetting in 2016 there was a large float of unknowns who went for Trump on the day. In 2020 there are many less unknowns so the polls look more solid … only question is how much the Republican gerrymander and vote suppression manages to trim what would otherwise be a winning lead to Biden.

      • Totes BeWokeMEMBER

        An American i know predicted Trump partly due to a FB page with hundreds of thousands saying they were voting Trump. He also noted the enormous turn outs. He’s getting them this time too, though you wouldn’t know watching the corrupt media.

        I asked him a few months ago, and he said Trump will win the college vote in a landslide. Whatever that means.

        I wouldn’t ride off Trump yet.

        Too short to bet on though IMO.

    • Totes BeWokeMEMBER

      Some betting agencies paid out early. Ridiculous thing is he was NEVER going to win. Didn’t have a chance, with everything except polls saying so.

  6. Equity market was falling last month as “concern about Biden’s tax rises”…..equity market is going up no matter what given the liquidity…..people are finding news to fit the market performance….

  7. who wins – don’t think it is as clear as David thinks. BUT irrespective the divide has broken and civil disorder in the US will get much much worse. Neither side will accept the result. Only an external pull to bring Americans together might. The election Mey – it is post-election and into next year (or two) that things are going to get ugly

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