Investors weighing election risks ahead of the first U.S. presidential debate between Vice President Kamala Harris and former President Donald Trump are already a lot more jittery than they were before Trump and his onetime opponent, President Joe Biden, met onstage in June.
Signs of angst are already mounting.
A three-month measure of implied volatility for a key Bloomberg dollar gauge is near its highest mark since the March 2023 banking crisis. Equities' so-called fear gauge is once again on the upswing after surging amid the market tumult of early August. Fixed-income traders are also weathering more turbulence, as mixed economic signals complicate bets on the scope and timing of Federal Reserve interest-rate cuts.
Against this backdrop comes Tuesday's debate, with the candidates pitted against one another in an extremely tight presidential contest. The match-up does promise a little more clarity for investors who've already spent months parsing campaign-trail language around tax proposals, tariff projections, government spending plans and policies on energy, electric vehicles, health care and more.
"This debate could be pivotal to the momentum of both campaigns," according to Kathleen Brooks, research director at foreign exchange broker XTB. "Although there are political shocks happening all over the world, the biggest risk is still the U.S. election in November."
Back in June, Biden's poor debate performance prompted his exit from the Democratic ticket, upending the election and pushing investors to pile into trades that would gain from a Trump-driven mix of inflationary fiscal policy and increased trade protectionism. While many of those directional wagers were unwound after Harris entered the race, the initial reaction shows how there is the potential for the debate to stir up the market, especially at a time when volatility is already on the rise.
"Even just forcefully reiterating known positions may focus the market on election trades again," Citi strategists including Dirk Willer and Alex Saunders wrote Tuesday.
A clear set of strategies geared toward a Harris victory have yet to materialize — and traders are eager for more clues on her political priorities. Here's what to watch:
Stocks
Equity investors will focus on how the candidates plan to execute their plans for taxes and tariffs. Goldman Sachs Group Inc. estimates that Trump's tax platform, which calls for lowering the corporate tax rate to 15% from the current 21%, could boost the earnings of S&P 500 companies by about 4%. In contrast, Harris' plan — an increase in the corporate tax rate to 28% — could reduce S&P profits by about 8%, Goldman Sachs said.
On tariffs, Trump has floated a 10% across-the-board levy, and even steeper penalty on Chinese-made goods. Harris' messaging suggests she won't go easy on China, but also sees no benefit in escalating tensions between the world's two biggest economies. A JPMorgan basket of stocks with high direct exposure to China includes companies across sectors such as semiconductors, industrials, materials, autos and health care. Some stocks worth watching include Nvidia, Broadcom, Apple, Tesla, Otis Worldwide and Agilent Technologies.
A recent analysis by Bloomberg Intelligence cited banks, technology and electric vehicle companies as those most exposed to the election. In particular, BI highlighted Fannie Mae, Freddie Mac, Morgan Stanley, Coinbase Global Inc., United States Steel Corp., Tesla, Centene Corp., Novo Nordisk A/S, First Solar Inc. and NextEra Energy Inc. as ones to watch this cycle.
Goldman Sachs created indexes that track trading strategies around each party's stated policies. They show that the Democratic gauge began outperforming the Republican benchmark right around the time Joe Biden stepped down as candidate and endorsed Harris.
Rather than choosing a side or even a market direction, equity traders may be better off simply betting on more swings.
"We would focus election trades on owning volatility as opposed to directional views," said Stuart Kaiser, Citigroup's head of U.S. equity trading strategy. One such trade involves a so-called straddle around the debate date, said Kaiser, referring to a bet that allows traders to profit from volatility.
The S&P 500 Index held a slight gain Tuesday, as did the Nasdaq 100. The Dow Jones Industrial Average slipped lower.
Bonds
After the June debate, the odds of a Trump victory increased in prediction markets. At the same time, longer-term Treasury bonds came under pressure and the so-called yield curve steepened as traders adjusted their positions to protect against Trump's potentially inflationary tax-and-trade policies.
Wall Street bond watchers are in rare agreement that whoever wins the election, the U.S. fiscal outlook is only set to worsen in the years ahead — and that the composition of Congress will be critical in determining spending plans.
While the absolute level of U.S. bond yields has declined since June in anticipation of imminent Fed rate cuts, investors will keep an ear out for any insights into fiscal plans from both Trump and Harris. Fear of a worsening outlook for debt and deficits could accelerate this year's steepening of the curve.
In trading ahead of the debate, Treasuries rallied as oil tumbled and after U.S. bank regulators released revised details on proposed bank-capital rule changes.
Currencies
The currencies of major U.S. trading partners such as Mexico and China have been the most sensitive to Trump's campaign rhetoric around tariffs — the latest of which involved his call for slapping a 100% tariff on countries that shun the dollar. During the first presidential debate, the Mexican peso weakened sharply in real time as Trump and Biden spoke.
Beyond that, Trump's approach to the broad value of the dollar — and Harris' position on the issue — are of critical importance to investors.
Wall Street strategists widely agree that Trump's tariffs would, at least in the short term, support the greenback. But Trump has also argued that the world's reserve currency is too strong. How he balances those competing ideas, and whether it involves rhetoric pressuring the Fed to cut interest rates more aggressively, could drive currency volatility.
Under a Harris administration, less uncertainty around U.S. policymaking — from trade and immigration to foreign policy — could weigh on the haven dollar, Wells Fargo strategist Aroop Chatterjee wrote Tuesday. The expiration of Trump-era tax cuts would also provide the Fed more room to ease monetary policy and in turn drag the greenback lower, Wells Fargo noted.
A Bloomberg gauge of the dollar rose on Tuesday, while the yen and Swiss franc rallied in broader risk-off trading.
-With assistance from Anya Andrianova.
