Currency markets are overestimating the risk of a delayed US election result, Goldman Sachs says
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- Markets are overpricing the risks of a delayed election result, Goldman Sachs said in a note Thursday.
- Analysts Michael Cahill and Alec Phillips, said markets are likely to have enough information on election night to determine a winner, as a number of battleground states allow votes to be processed and counted well before the day itself.
- The bank said currency options in particular are overestimating the risks of a delayed election result.
- The bank said: “The S&P can trade the likely outcome, even if the AP does not call the race,” after Election Day.
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Financial markets are showing investors are overestimating the risk of a delayed result to November’s presidential election, Goldman Sachs said in a note Thursday.
The note by Michael Cahill and Alec Phillips said the market appears to be “pricing too high of a probability” that it will take a long-time to sort a winner in the upcoming November 3 presidential election.
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While Goldman acknowledges this may be a “tail risk”, it notes a number of states, including key battlegrounds, allow votes to be processed and counted “well before” election day.
“Taken together with cross-state correlation on many sources of polling errors, it seems likely that markets will have enough information on Election Night, or soon thereafter, to gauge the likely winner, even if the race takes longer to be officially called,” the analysts wrote.
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The analysts pointed out that, in the currency markets, implied volatility – a measure of investor expectations on how much an asset might fluctuate – is much higher for the coming two months than it is for shorter-dated options and particularly so for currencies that have been affected by US executive policy actions, such as the Chinese yuan, the Russian rouble or even the euro.
The level of uncertainty priced into currency options may be what the bank called “muscle memory of 2016”, when the run-up to President Donald Trump’s surprise win brought with it a steep drop in the value of a number of currencies against the US dollar, and in the Mexican peso in particular, as protectionist rhetoric heated up.
The bank said: “While some of these same factors are likely to shape the market reaction once again-for example, in CNH [Chinese yuan]-we think the combination of 2016 muscle memory and significantly higher growth uncertainty today could be pushing the market to overprice how much clarity the election itself will provide.”
“The S&P can trade the likely outcome, even if the AP does not call the race,” Goldman said.
Goldman Sachs said earlier this week traders are betting that market volatility is likely to be greater in the aftermath of the November presidential election than in the run-up to the vote, and this will last well into 2021.
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