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Will Volatility Last or Flatline after Extreme Response to Election?

Will Volatility Last or Flatline after Extreme Response to Election?

2016-11-10 02:57:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Volatility in price and implied activity products surged during the US election voting
  • S&P 500 Eminis, USD/MXN and the Dollar experienced ranges that rival historical records
  • Yet as of Wednesday morning markets were little changed and volatility levels deflated

See the DailyFX Analysts' 4Q forecasts for the Dollar, Euro, Pound, Equities and Gold in the DailyFX Trading Guides page.

The markets just past through an extremely volatile period that easily rivals the Brexit and August 2015 financial tumble. It wasn't difficult to trace back to the source of this exceptional activity. The US Presidential election proved both headline and investor concern worthy. That said, the shock of volatility seemed merely a flash in the pan considering the degree of the unexpected outcome with Republican candidate Donald Trump winning the presidency. Was the overnight fireworks between Tuesday and Wednesday the extent of the markets uncertainty on risk? Or, was this just an early signal that portends a more durable rise in uncertainty and market swings?

For those that were watching the markets heat up while polls were open, the level of activity was shocking. From the benchmark S&P 500 (assessed through the liquid after-hours in emini futures), the market plunged to a limit down, 5 percent. The Dollar collapsed and recovered versus many major counterparts with the ICE Dollar Index posting a 2.8 percent range on the day that measured up to the Brexit and ECB stimulus failure (December 3rd) events. At the center of the global macro focus though was the Mexican Peso. USD/MXN experienced an unprecedented 2.6 percent rally to record highs.

Yet, for many of the most liquid moves experiencing such extreme moves, the close of the subsequent session seemed to clear the air. Both the benchmark equity index and currency ended Wednesday higher and the most closely watched volatility indexes (VIX among them) dropped sharply. In the short-term anxiety will take into consideration the most of extreme of possible outcomes. While the win by Donald Trump was unexpected given polls, it did not constitute an immediate market crisis. Therefore, a near-term and expensive risk build up quickly recedes. That said, the outlook will not likely further deflate to the degree of complacency we've seen in previous months and years. Structural change to speculative exposure before the election build up and the uncertain policy path of the new President will promote lasting volatility. What should we expect and how do we prepare post-election? That is the focus of today's Strategy Video.

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