October 20, 2020
Equity markets continue to price significant risk of a contested election outcome. The best indication comes from the VIX futures market where both the November and December VIX futures trade at a premium to October. Equity markets are large and liquid, but smaller than bond markets and smaller than FX, which is the largest and most liquid market in the world. If there’s real trouble brewing, it should be evident in FX markets ahead of time. Safe haven currencies like JPY repriced lower following the first presidential debates and undented Biden national poll advantage. Given the recent narrowing in some battleground polls, the bearish narrative from 9/3 that included contested election results and a presumed lack of pre-election fiscal stimulus could make a comeback. And if the narrative has the potential to become a real near-term risk event, it should show up in the form of firmer JPY.