The key dates to note through the US election cycle

Traders will be on the lookout to see how these events impact future polls, and how changes in the polls influence the conviction of market players wanting to express US election trades.

As we see in the US election schedule, we lay out a combination of political events that could influence voting intentions, as well as two important FOMC meetings – both have the potential to alter sentiment and our trading environment.

The optimal time to express US election trades

As we opined in “How technical analysis and price action analysis can help traders through the US election”, one of the key factors when trading through the US election cycle is to consider the optimal time to express election trades. When we have a thorough knowledge of the market-impacting policies for both the Republican and Democratic parties, we can consider how certain markets may react to changes in the polling and the probability that these policies are implemented.

Of course, the market itself is the best guide on how the collective is expressing their probability of an election outcome. So when the election becomes the dominant focus of market participants, we’ll see a clear reaction in markets to changes in the polls.

Looking at when media interest in the US election picks up

Sentiment in markets can be heavily influenced by social media and a broad array of news publications. In the November 2020 US election, it wasn’t until 23 October that we started seeing a truly noticeable pick up in articles mentioning the US election. It won't surprise that on the week of the election, the news flow was deafening.

Total news articles containing “US Election” (weekly)

When has the financial market typically reacted?

By way of a guide on US equity volatility, the 5-day average of the S&P500 daily high-low price range spiked in early September to 90 points and stayed relatively elevated right through November.

Looking at the VIX index (S&P500 30-day implied volatility) as a proxy of equity volatility, it wasn’t until late October that we saw heightened implied volatility in the S&P500, with traders buying portfolio protection and hedging equity risk, with the VIX index hitting 41% just before the election.

In the 2020 election, it was USDMXN that became a default expression of Trump’s prospects of being re-elected President, with traders selling the MXN given Trump’s campaign policy to walk away from NAFTA

Looking at the daily chart in the lead-up to the US election, we can also see the 5-day average of the daily high-low trading ranges (red line) rising sharply from 18 September, before peaking in late September. We also saw strong buying interest from 18 September, with the pair rallying 9% as the polls shifted in Trump’s favour, before resuming its long-term downtrend.

Considering market liquidity and the cost to trade

Another factor that can lead to exaggerated price movement and higher trading costs is liquidity. Liquidity can take many forms, but in this case, I am looking at order book liquidity, and the ease to transact at the quoted bid-offer price. In 2020 top liquidity in the order books was well contained, with S&P500 futures bid-offer spreads only noticeably widening in the week before the election.

(S&P500 futures bid-offer spread / mid-point)

Market interest should increase significantly after the Trump v Hariis live debate

Instinctively, in this election cycle, markets may become more sensitive to polls and prediction markets post-US Labor Day (2 September) and perhaps even after the first debate between Kamala Harris and Donald Trump (10 September).

The live debate could be influential in determining the voting preference for many of the ‘undecided’ voters that still remain. It may also influence any loose swing voters, notably if one candidate is far stronger than the other.

The 1st live debate between the two vice presidents, Tim Walz (DEM) and JD Vance (REP), is scheduled for 1 October. This may not be as influential on voting intentions, however, given the strong views of the respective VPs it could result in engaging viewing.

We then turn to the second live presidential debate between Trump and Harris due to take place in October, although at the time of writing no exact date has been agreed upon. One would expect that most of the undecided voters would have made up their minds on who they would be voting for by this point. However, if one presidential candidate slips up, or one is far more dominant than the other it could still be influential.

Harris vs Trump - Who has the more market-friendly policies?

While Trump and Harris are campaigning on very different policies, I can make the argument that Trump has the more US market-friendly policies. Granted, many see his policy on trade, with promises of 60% tariffs on Chinese imports/10% on all imports, as a net negative for sentiment. However, with promises of lower corporate tax rates, deregulating business and the full rollover of the 2017 Tax Cuts and Job Act, this may outweigh his trade policy.

Kamala Harris is hardly campaigning on austerity and while she has talked about raising the corporate tax rate to 28%, a general continuation of current policy, with reduced uncertainty of trade relations and further deficit spending may not be that bad for risk.  

We shall soon find out which candidate’s policies the market sees as the most positive for risk – but the real question is when we see the market really start to trade the US election. Looking at how markets reacted in the lead-up to the 2020 election, and the schedule of events laid out above, markets may likely start to see increased volatility and range expansion from late September. Be prepared to react.