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US stock futures tumble as investors see Trump bucking odds
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The White House as seen on Tuesday, Nov. 8, 2016 in Washington. (AP/Pablo Martinez Monsivais)
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S stock futures plunged as investors rushed to price in a potential victory by Donald Trump in the US presidential race, as rising odds of victory for the Republican in a succession of key swing stakes shocked investors into a near-panic and threw global markets into disarray.
December contracts on the S&P 500 Index lost 4.3 percent to 2,044 at 11:23 p.m. in New York, extending losses as Trump held slim leads in numerous must-win states for Clinton. Key battlegrounds of Michigan and New Hampshire are among other states where polls have closed and results have been too close to call, but show Trump leading over Democrat Hillary Clinton. Ohio went to Trump.
“The marketplace at least has upgraded dramatically Trump’s chances of pulling this off -- clearly the market is pretty nervous,” said David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc., which oversees US$796 billion. “It’s across-the-board and there’s this general reaction, which just shows you how jittery the market is about this.”
S&P 500 futures erased the rally that began Sunday night on word the FBI had resolved its investigation of Clinton’s e-mails. The benchmark gained 2.6 percent on Monday and Tuesday, it’s third biggest gain ever in the two days before a presidential election.
A Trump victory, buttressed by electoral gains from Florida to North Carolina, had been portrayed by analysts as having the potential to unhinge markets that had banked on a continuation of policies that coincided with the second-longest bull market in S&P 500 history.
The stock market has shown itself more comfortable with the Democrat taking over the White House as Trump is considered less predictable after his policy positions have not been consistent during the race. At stake is leadership of the world’s largest economy at a time when America is divided over immigration, trade and the country’s role in the wider world.
Traders are especially on edge after the UK’s vote to leave the European Union was largely not predicted by polls and betting markets. Declines in futures that night triggered the Chicago Mercantile Exchange’s limit down price curbs. The rules come into effect when S&P 500 contracts decline 5 percent from a reference price that is calculated in the last 30 seconds of trading on the previous day.
E-mini futures on the benchmark gauge settled Tuesday at 2,135.12, implying a trigger at around 2,029. The curb means the contract cannot trade at a lower price for the remainder of the overnight session.
“Everything thing we’ve been reading suggested you’d see a Clinton win and that Republicans take take control of the House. Every incremental vote that makes that outcome more difficult, that’s a vote towards a lower market,” said Mike Bailey, director of research at FBB Capital Partners, which oversees $900 million. “As the race looks more competitive, that’s going to weigh on equity prices as we head into tomorrow.”
Swaps traders trimmed wagers on tighter US monetary policy. The market-implied chance of a December rate hike by the Federal Reserve plunged below 50 percent, based on US overnight indexed swaps that trade 24 hours a day, compared to 82 percent at 5 p.m. The OIS-derived probability tends to be a few percentage points lower compared to calculations based on fed funds futures.
About 700,000 e-minis contracts expiring in December have changed hands since the futures market started trading at 6 p.m. New York time, 22 times the average volume at this time of the day over the past month, data compiled by Bloomberg show.
The S&P 500 Index advanced 0.4 percent Tuesday to cap its biggest two-day rally since June. The index sits at the highest in two weeks after rebounding from a nine-day rout that was the longest slump in 36 years.
Final voter polls taken before voting began Tuesday showed Democrat Hillary Clinton with a narrow lead over Republican Donald Trump. The two have spent the past days campaigning in key states as polls showed the race had tightened. State-by-state surveys indicate a narrow lead for the Democratic candidate, while websites that take bets on the presidential victor show her odds of winning the White House are generally about 80 percent.
The walloping in stocks will test the reliability of hedges built up over the last month as the election neared. Some of the biggest were tied to swings in the CBOE Volatility Index, the options-derived gauge of market stress which saw its longest streak of gains ever last week. Volume in VIX futures have been at or close to records in past weeks, a sign institutional investors took steps to mitigate a potential plunge.
“Hedges are pretty tricky when it’s such a binary outcome of results, meaning that the initial reaction for a Trump victory was clearly going to create some volatility around the equity market,” aid Mark Heppenstall, chief investment officer of Penn Mutual Asset Management which oversees $20 billion. “It’s always hard to have effective hedges when there are expected outcomes.”
Regardless of how equity prices react on Nov. 9, next-day moves in the S&P 500 are useless in telling what comes after, as gains or losses over the first 24 hours predict the market’s direction 12 months later less than half the time.
In the 22 elections going back to 1928, the S&P 500 has fallen 15 times the day after polls close, for an average loss of 1.8 percent. Stocks reversed course and moved higher over the next 12 months in nine of those instances, according to data compiled by Bloomberg.
