Another turbulent day in U.S. politics caused the stock market's volatility gauge to spike again Oct. 6, after President Donald Trump tweeted that he was ruling out another stimulus package until after the Nov. 3 election.
The CBOE Volatility Index, or VIX, jumped from 28.0 to 29.5, its highest level since Sept. 10. A reading of 30.0, a historically high level, has preceded average daily movement of 1.3% in the S&P 500.
The S&P 500 dropped 2.05% in the last hour and a half of trading Oct. 6 after Trump tweeted, "I have instructed my representatives to stop negotiating until after the election."
Trump later tweeted out calls for some limited stimulus measures, and the VIX eased somewhat during the first half of the U.S. trading day Oct. 7. It was trading at 28.5 shortly after 11 a.m. ET.
But politics continues to play on the nerves of investors who have been weighing the welcomed increased likelihood of fiscal stimulus in the case of a Democratic president versus the unwelcome higher taxes that a Joe Biden presidency would likely also bring.
"Markets were starting to look through the likely lack of short-term stimulus and were instead focusing on the prospect of more stimulus after the increased likelihood of a Democratic clean sweep," Deutsche Bank strategist Jim Reid wrote in a research note Oct. 7. "The late price action last night suggests otherwise, but I would still say that further evidence that this election will result in a definitive result will offset any short-term stimulus disappointment."
With Democratic nominee Biden increasing his polling lead, some investors noted that greater visibility on who will occupy the White House after the election could reduce volatility.
"Concern about higher corporate taxes and more regulation in a Blue Wave still exist, but they’re taking a backseat to the anticipation of the fiscal floodgates being wide open in 2021. Also helpful is that a decisive election result reduces the risk of a protracted and contested outcome," Jason Draho at UBS Global Wealth Management wrote in a market commentary.
By contrast, corporate credit markets pointed to a decline in risk, with spreads against Treasurys reversing the widening of recent weeks.
The U.S. investment-grade corporate bond spread narrowed to 140 basis points by the close of Oct. 5 from 145 bps Sept. 28.
There was a sharper contraction in the U.S. high-yield market. Having widened to a 10-week high of 564 bps by Sept. 24, the spread has narrowed sharply to 518 bps by the close of Oct. 5, back to mid-September levels.
The spread is still wider than before the pandemic sent financial markets into a frenzy in March but has reversed 77.9% of the widening experienced then.
The emerging market corporate spread also narrowed, reaching 350 bps at the close of Oct. 5, down from 368 bps, a two-month high, a week earlier.
The Libor-OIS spread, a key risk indicator for the U.S. banking sector measuring the difference between the three-month dollar London interbank offered rate and the overnight indexed swap rate, was 13.1 bps as of Oct. 6, down from 13.8 bps on Sept. 29.
In the leveraged-loan market, the share of issues priced below 80 cents on the dollar, a closely watched indicator suggesting a company is more likely to default, fell to 5.0% on Oct. 5 from 5.3% on Sept. 28.
