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LONDON (Reuters) – Investors, already skittish ahead of U.S elections in November, now have another thing to worry about: the president’s health.
President Donald Trump’s COVID-19 diagnosis triggered a sell-off in stocks and oil as investors moved away from risk assets on Friday.
“The president of the United States has got a disease which kills people. People are de-risking because of that,” said Chris Weston, head of research at brokerage Pepperstone Group in Melbourne.
But where investors go from here depends, to a large degree, on how Trump copes with a disease which has killed more than a million people around the world.
“This is a new uncertainty in a world which is mixed-up already, which is not the best,” said Chris Bailey, a European strategist at Raymond James.
Major U.S. stock indexes fell in early trading, with the benchmark S&P 500 (SPX) off 0.8% and the tech-heavy Nasdaq (IXIC) down 1.1%, paring steeper initial losses. Oil prices fell 5%.
Aside from the Trump news, investors were digesting a jobs report showing U.S. employment growth slowed more than expected in September and back-and-forth negotiations over a U.S. coronavirus relief plan.
If Trump’s symptoms turn out to be mild and he recovers quickly, markets could stabilize and the Republican president could use the experience to project his image as a fighter in the campaign against Democratic challenger Joe Biden.
But if the 74-year-old gets very sick and has to be hospitalized, as British Prime Minister Boris Johnson was earlier in the year, or the virus spreads to other members of his administration, investors will be alarmed.
The news prompted investors to prepare for a period of heightened volatility, with most agreed that markets will remain on edge for the foreseeable future.
Volatility gauges rose, with the widely watched Cboe Volatility Index (VIX) up to just over 28 points after the U.S. market opened, from around 27 points on Thursday.
Although the moves were nowhere as large as seen during the depths of the market mayhem in March, Trump’s news comes at a critical time with only a month left before the U.S. election.
“It’s one more insecurity heading into a tight, contentious election,” said Oliver Pursche, president of Bronson Meadows Capital Management in Fairfield, Connecticut.
In a sign of concerns regarding the impact of Trump’s diagnosis on the election, the gap between October and November VIX futures narrowed. VIX futures reflect volatility expectations in the 30 days following their expiration, so October futures capture sentiment regarding the Nov. 3 election date.
In currency markets, implied volatility gauges for the yen over the next month rose to a four-week high of 7.6 vols , signaling more choppy trading ahead.
David Arnaud, a fixed-income fund manager at Canada Life Asset Management, said that he had positioned for uncertainty in the coming weeks by increasing exposure to safe-haven assets such as the U.S. dollar, Japanese yen and U.S. Treasuries.
While MUFG strategists said Trump’s diagnosis could strengthen his argument of opening up the U.S. economy if he recovers quickly, some like Saxo Bank say Biden’s chances of a win had jumped, a negative for risky assets.
The news spread to betting markets. Betfair suspended betting on the outcome of the U.S. election on Friday, its website showed. Betfair had Biden’s probability of winning at 60% on Wednesday after the first debate on Tuesday night.
Investors, who have driven a long rise in global equity markets, were already nervous given the lack of progress on more U.S. fiscal stimulus and a brief sell-off in high-flying U.S technology shares last month.
“Whether it’s Trump or Biden, the biggest problem is uncertainty. As long as we’re uncertain about who will win the election, it is difficult for markets to truly settle,” said Ayako Sera, market strategist at Sumitomo Mitsui (NYSE:SMFG) Trust Bank in Tokyo.
(Graphic: FX and equity volatility – https://fingfx.thomsonreuters.com/gfx/mkt/xegvbjwwkvq/FX%20and%20equity%20volatility.JPG)
