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- Markets should prepare for volatility to balloon after Election Day, Wells Fargo said Tuesday.
- Wells Fargo head of rates strategy Michael Schumacher told CNBC’s Trading Nation Tuesday, options are showing greater volatility.
- “The big takeaway is three month options vol is still quite high, and it has not really come down,” he said.
- He thinks investors will flock to US Treasuries due to greater volatility, and the US-10 year yield may fall to 0.40% from around 0.68%.
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The stock market should prepare for ample amounts of volatility post Election Day, Michael Schumacher, head of rates strategy at Wells Fargo, told CNBC’s “Trading Nation” Tuesday.
“Normally, you might think that it’s Election Day or Election Day plus one that is super volatile,” Schumacher said. “But this year, markets are saying ‘Hey, wait a minute. We see a lot of vol after the election.”
Wall Street’s favorite indicator of investor anxiety, the VIX index is currently trading around 26, having spiked as high as 69 during the height of the coronavirus markets crisis in mid-March.
VIX futures are suggesting investors anticipate bigger market swings as the election draws closer. The front-month October contract is trading around 30.25, while November futures, which cover the period around the election, are trading at 30.50.
“The big takeaway is three-month options vol is still quite high, and it has not really come down versus the two,” Schumacher said, referring to the premium of the November contract over October. “Why is that? Maybe it’s a messy result. Maybe the results aren’t even clear for a few weeks. Maybe Brexit gets onto the scene, as well,” he added.
He thinks the threat of greater volatility in the equity markets may prompt some investors to flock to Treasuries, which are generally considered to be safe-haven assets.
The yield on 10-year US Treasury notes may fall below 0.40% from around 0.67%, where it currently trades, as a result, according to Schumacher. He sees yields subsequently trading closer to 0.9% by the end of the year.
He said: "It sounds like a really big move. But if you consider it in the context of things that could transpire in the next couple of months, I'd say it's not that big,"
Schumacher noted that when incumbent Republican president Donald Trump won the election, in something of a surprise victory, in 2016, the yield rose by as much as 60 basis points in a month.
He thinks COVID-19 is still a bigger threat to markets than any risk stemming from uncertainty around the upcoming November election.
"It's Covid number one, election number two, and the Fed probably number three," Schumacher said. "If there's a significant change in the progression of that disease, we think that could make yields go quite a bit in either direction, frankly."
His comments mirror ones made by BTIG strategist Julian Emanuel who said this week an "abnormal pattern" of out-of-the-money calls trading higher than out-of-the-money puts, is implying higher market risk.