Wall Street was already girding itself for a uniquely turbulent US election, but the news that President Donald Trump has tested positive for coronavirus adds another source of nerves to the outlook.
US stock market futures seesawed ahead of Wall Street trading on Friday, indicating that the S&P 500 would slip 1.8 per cent after the opening bell. Meanwhile, the Vix volatility index — a gauge of the US stock market choppiness implied by options prices, often referred to as Wall Street’s “fear gauge” — climbed 2 points to 29, well above the long-term average of about 20.
The jitters, just days after a chaotic debate between Mr Trump and his Democratic rival Joe Biden, suggest that the run-up to the election in November could be testing for investors who were already preparing for a turbulent period after the vote.
“This offered a [nervous] impulse for financial markets and added in another layer of uncertainty ahead,” noted Ian Lyngen, an analyst at BMO.
Analysts at Rabobank went through a list of questions running through their heads. “Does the fact that Trump will now spend half of the remaining time prior to the election in quarantine mean his odds of re-election have fallen? Does his testing positive give the lie to his repeated assertion that the virus is under control?” they wrote on Friday morning.
However, a rapid recovery ahead of the election could boost Mr Trump’s chances, for example if it precluded further fractious debates, or highlighted his self-professed strength, Rabobank analysts speculated.
“Such a development would [also] allow the president to claim that the Democrats have been overly alarmist as regards the virus and that the economy would be unnecessarily ruined in their hands,” Rabobank added.
Nannette Hechler-Fayd’herbe, chief investment officer for Credit Suisse’s international wealth management division, said Mr Trump contracting the virus was a timely reminder to markets that a resurgence of the pandemic remained a major danger.
“While this move may reflect initial caution in the face of potential risks around the US president’s health, it more likely serves as a wake-up call for financial markets to expect a seasonal re-acceleration of Covid-19 infections around the world,” she said. “What can happen to the US president can happen to the population more broadly, with the potential disruptions to economic activity that this may entail.”
Highlighting how investors fret volatility will remain elevated, Vix futures contracts maturing in October — which cover the run-up to the election — climbed 2 points on Friday to nearly 33 points, and the contracts for November and December edged up 1 point to almost 34 and 32 points respectively.
Analysts stressed that the impact of the news on the outcome of the election — if any — was highly uncertain. But the knee-jerk reaction of many investors was to head for safety. “We’re in territory where there’s no rhyme or reason to what markets do today,” said George Pearkes, a strategist at Bespoke Investment Group. “It’s all psychological.”
Futures contracts tied to the Vix that mature around the time of the US election and even after that have been edging higher for months, as investors have grown increasingly concerned that no matter who wins the vote, the other side will dispute the result and it will lead to a drawn-out process.
Mr Trump has fanned those fears, by equivocating on whether he would commit to a peaceful transition of power in the event that he loses, with the White House incumbent instead repeating without evidence his assertion of widespread fraud involved in the postal votes sent out due to the pandemic.
However, Mr Pearkes said that the likelihood of post-election political turmoil was probably overdone, given the scale of former vice-president Joe Biden’s lead in most polls.
“There are risks around the transition and how it evolves, but it’s easy to get carried away by narratives,” he said. “If Trump loses by 7 points [the current national polling] then it’s hard to see him pulling any monkey business.”
Adam Sender, chief investment officer of SC&P, an investment group, also stressed that Mr Trump’s diagnosis was unlikely to weigh on markets beyond the immediate term.
“The market has gone through a lot of trauma this year and has rallied,” he pointed out. “While the president getting this is upsetting, we have no idea how sick he is and I don’t see this as being devastating news. I wouldn’t be surprised if the market rallies back pretty strongly.”