As the United States grapples with the high-stakes presidential election, financial markets are treading cautiously, bracing for the potential impact of the outcome. Investors are closely monitoring the developments, seeking to position themselves for the road ahead, regardless of which candidate emerges victorious.

Volatility Looms, but Markets Remain Resilient

Calm Before the Storm?

Contrary to the anticipated volatility, the stock and bond markets have remained relatively calm on Tuesday, with the VIX index, often referred to as Wall Street's "fear gauge," hovering at a moderate level of 22. This suggests that while investors are cautious, they are not yet gripped by panic. The STOXX index in Europe edged down slightly, while the MSCI Asia-Pacific index outside Japan rose, indicating a mixed sentiment across global markets.

Currency Jitters and Cryptocurrency Movements

However, the currency markets have shown more pronounced activity, with the euro-dollar and dollar-Mexican peso pairs experiencing spikes in implied volatility. This reflects the recognition that the outcome of the election could have significant implications for trade policies, particularly if the Republican candidate, Donald Trump, were to defeat the Democratic candidate, Kamala Harris. Interestingly, Bitcoin has seen a 2.6% increase, as investors anticipate more favorable cryptocurrency policies under a Trump administration.

Bonds and the Dollar: Waiting for the Verdict

The bond market and the U.S. dollar have also remained relatively stable, with 10-year Treasury yields holding steady and the dollar trading within a narrow range against major currencies. Analysts suggest that the markets have already priced in their expectations, and are now awaiting the final results to determine the next moves.

Battleground States and the Potential for Prolonged Uncertainty

As the election results begin to trickle in, the focus will shift to the key battleground states, such as Georgia, North Carolina, Pennsylvania, Michigan, Arizona, Wisconsin, and Nevada. However, a clear winner may not be known for several days, as Trump has signaled his intention to challenge the results, as he did in the 2020 election.

China's Currency and the Tariff Conundrum

China, which is seen as being on the front line of potential tariff risks, is closely monitoring the situation. The Chinese yuan is trading with heightened volatility against the U.S. dollar, reflecting the market's uncertainty about the future of trade policies. Investors are also closely watching the upcoming meeting of top policymakers in Beijing, which is expected to address local government debt refinancing and spending, potentially providing some stability to the Chinese markets.

Preparing for the Unexpected

Ultimately, the U.S. election represents a pivotal moment for the global economy and financial markets. Investors are bracing for a range of potential outcomes, from a continuation of the current economic policies under a Harris victory to a more protectionist and isolationist approach under a Trump presidency. As the drama unfolds, market participants will need to remain vigilant, ready to adapt to the shifting landscape and the implications it may have on their investment strategies.