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UPDATE 4-Trump's positive COVID-19 test throws markets pre-election curveball

Fri, 2nd Oct 2020 10:36

(Updates with latest market action)

By Saikat Chatterjee and Lewis Krauskopf

LONDON/NEW YORK, Oct 2 (Reuters) - Investors already
skittish ahead of U.S. elections in November now have another
thing to worry about: the president's health.

News of Donald Trump's positive coronavirus test on Friday
triggered a decline in oil prices and stocks.

U.S. equities cut some of their losses by the end of the
volatile session as investors digested the news and weighed the
prospect that lawmakers would agree on a long-awaited
coronavirus relief bill before the election.

Where investors go from here could rest on how Trump copes
with a disease that has killed more than a million people around
the world, more than 207,000 of them in the United States.

"This is a new uncertainty in a world which is mixed up
already, which is not the best," said Chris Bailey, a European
strategist at Raymond James.

In the United States, the benchmark S&P 500 stock index
ended down about 1% while the tech-heavy Nasdaq
dropped 2.2%. MSCI's gauge of stocks across the globe
slipped 0.7%. Oil prices fell more than 4%.

Markets may have been somewhat soothed by news that Trump's
opponent, former Vice president Joe Biden, tested negative for
the virus after the two men met for their first debate on
Tuesday night.

"If you have the two nominees both infected with COVID, that
would really throw another huge uncertainty in the election and
what happens next," said Keith Lerner, chief market strategist
at Truist/SunTrust Advisory. "We’ve never had something like
that happen before."

If Trump's symptoms continue to be mild and he recovers
quickly, the Republican president could use the experience to
project his image as a fighter in the campaign against Biden.

But investors might be more alarmed if the 74-year-old gets
very sick and has to be hospitalized, as British Prime Minister
Boris Johnson was in the spring, or the virus spreads to other
members of Trump's administration.

The news fueled the sense that investors are headed for a
period of heightened volatility, with most agreed that markets
will remain on edge for the foreseeable future amid uncertainty
over the path of the pandemic as well as the election.

Volatility gauges rose, with the widely watched Cboe
Volatility Index edging up to 27.63 points, from around
27 points on Thursday, after rising to nearly 30 points earlier.

The moves were nowhere as large as during the depths of
market mayhem in March but, with only a month left before the
election, Trump's news comes at a critical time.

In a sign of concerns regarding the impact of his diagnosis,
the gap between October and November VIX futures
narrowed. VIX futures reflect volatility expectations in the 30
days following their expiration, so October futures capture
sentiment regarding the Nov. 3 election date.

In currency markets, implied volatility gauges for the yen
over the next month rose to a four-week high of 7.6 vols
, signaling more choppy trading ahead.

David Arnaud, a fixed-income fund manager at Canada Life
Asset Management, said that he had positioned for uncertainty in
the coming weeks by increasing exposure to safe-haven assets
such as the U.S. dollar, Japanese yen and U.S. Treasuries.

While MUFG strategists said Trump's diagnosis could
strengthen his argument of opening up the U.S. economy if he
recovers quickly, some like Saxo Bank say Biden's chances of a
win had jumped, a negative for risky assets.

The news spread to betting markets. Betfair suspended
betting on the outcome of the U.S. election on Friday, its
website showed. Betfair had Biden's probability of winning at
60% on Wednesday after the first debate on Tuesday night.

Investors, who have driven a long rise in global equity
markets, were already nervous given the uncertain prospects for
more U.S. fiscal stimulus and a brief sell-off in high-flying
U.S. technology shares last month.

"Whether it's Trump or Biden, the biggest problem is
uncertainty. As long as we're uncertain about who will win the
election, it is difficult for markets to truly settle," said
Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank in
Tokyo.

(Reporting by Saikat Chatterjee and Lewis Krauskopf; Additional
reporting by Dhara Ranasinghe, Gertrude Chavez-Dreyfuss, April
Joyner and Stephen Culp
Editing by Jonathan Oatis and John Stonestreet)

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