Volatility grips US stock futures as election heads down to the wire

Investors braced for a tight US election with the potential for the contest to drag on, as the outcome appeared to rest on a handful of pivotal states that could take days to reach a final tally.

Markets swung overnight as results from Tuesday's national election trickled in, with the control of the presidency and Congress in the balance.

Republican President Donald Trump won the battleground of Florida and took the lead over Democratic rival Joe Biden in other U.S. swing states, but Biden voiced confidence he would win the election by taking three key Rust Belt states.

"Paths to the final outcome could be very volatile and you could easily end up being on the wrong side of the trade because this is based on incomplete information," said Binay Chandgothia, portfolio manager with Principal Global Investors in Hong Kong.

US stock index futures were up but off earlier highs in choppy trading, with Nasdaq futures outperforming.

The US dollar strengthened and the yield on the 10-year U.S. Treasury note dipped.

"I think markets were jolted a little bit by how close the race now appears," said Mona Mahajan, senior U.S. investment strategist at Allianz Global Investors in New York. "We are seeing a little bit of a flight-to-safety response in some asset classes."

Betting market odds tightened but still favored Trump after flipping to favor the president over Biden, according to data from three aggregators.

In addition to the presidency, control of the U.S. Senate was potentially up for grabs in Tuesday's vote, with Democrats hoping to wrest power from Republicans.

NO 'BLUE WAVE'

But some investors saw fading chances for Democrats to score a big win in the Senate as Republicans held the line in several contests that had seemed up for grabs.

Markets have been fixated in recent weeks on prospects for a massive fiscal relief stimulus to help the economy recover from the coronavirus pandemic that has killed more than 230,000 Americans.

A "Blue Wave" sweep that sees Biden win and Democrats capture the U.S. Senate had captured a lot of investor attention in recent weeks and was seen as the surest path to a massive fiscal package that could support equities and accentuate trends of a weaker dollar and steeper yield curve.

"It's pretty clear there is no definitive wave for either party," said King Lip, chief investment strategist at Baker Avenue Asset Management in San Francisco.

One dramatic move was in Nasdaq 100 index futures, which gained sharply.

Tech shares have been seen as particularly susceptible to selling pressure on fears of rising capital gains taxes if Democrats were to win, as well as on concerns of greater regulatory scrutiny.

The increased chance of a Republican Senate was seen as decreasing the chance of rising capital gains taxes and boosting tech, said Andrew Brenner, head of international fixed income at NatAlliance Securities.

Some investors see a Trump win, which would take tax hikes favored by Biden off the table, as a best-case scenario for the stock market. Ahead of the election, JPMorgan predicted an "orderly" Trump victory as the most favorable outcome for equities.

Since the 2016 election of Trump, who ushered in corporate tax cuts that supported equities but also imposed trade tariffs that led to volatility, the U.S. stock market has gained over 57 per cent and hit new highs.

Investors remain most worried about the race being too close to call or contested for a while.

"That's my biggest fear, that come inauguration day we don't have a president," said David Tawil, president of Maglan Capital in New York. "The one thing that all investors pray for is that in a short period of time there is an undisputed winner because anything other (than that) would be catastrophic."