Investors are weighing election risks ahead of the first presidential debate between Biden and Trump, and they are more nervous than they were before the televised debate between Trump and Biden in June.

There are increasing signs of market anxiety. The three-month implied volatility index for a key Bloomberg dollar index is approaching its highest level since the banking crisis in March 2023. The so-called panic index of the stock market rose again after the market turbulence in early August. Fixed income traders are also experiencing more volatility as mixed economic signals make betting on prospects for a rate cut by the Federal Reserve more complicated.

Volatility in foreign exchange, stocks, and bonds is increasing.

Investors have spent months analyzing the wording of tax proposals, tariff predictions, government spending plans, as well as policies on energy, electric vehicles, and healthcare during the election campaign, and this debate is expected to bring them more clarity.

"This debate could be crucial for the momentum of both candidates' campaigns," said Kathleen Brooks, research director at forex broker XTB, "despite political shocks happening around the world, the biggest risk is still the US election in November."

In June, Biden's poor performance in the debate led to his withdrawal from the Democratic race, disrupting the election and prompting investors to flock to trades that profit from Trump-driven inflationary fiscal policy and escalating trade protectionism. Although many of these targeted bets were canceled after Harris joined the race, the initial reaction suggests that the debate could stir the market, especially when volatility is already rising.

A series of specific trades representing a Harris victory have yet to materialize, and traders are increasingly eager for more clues about her political priorities. Here are some key points to watch before Tuesday's debate:

Stock market.

Stock investors will be paying attention to how the candidates execute their tax and tariff plans, as the differences between the two parties in these two areas are very clear.

Goldman Sachs estimates that Trump's tax policy calls for a reduction in the corporate tax rate from the current 21% to 15%, which could increase the earnings of S&P 500 index component companies by about 4%. In contrast, Goldman Sachs states that Harris' plan, which would raise the corporate tax rate to 28%, could reduce the earnings of S&P 500 index component companies by about 8%.

A recent analysis by Bloomberg Intelligence (BI) pointed out that banks, technology, and electric vehicle companies are the most affected by the US elections. BI specifically highlighted Fannie Mae, Freddie Mac, Morgan Stanley, Coinbase Global Inc., United States Steel Corporation, Tesla, Centene Corp., Novo Nordisk A/S, First Solar Inc., and NextEra Energy Inc. as worth paying attention to.

Goldman Sachs has created an index to track trading strategies around the public policies of the two parties. The data shows that when Biden resigned as a candidate and endorsed Harris, the Democratic Party's index began to outperform the Republican Party.

The trading strategy index created by Goldman Sachs to track the public policies of the two parties

Instead of taking sides or even following the direction of the market, stock traders may be better off betting on more volatility directly.

Stuart Kaiser, Head of US Stock Trading Strategy at Citigroup, said, "We will focus our election-related trades on holding volatility exposure rather than directional views." According to him, one of the trades involves so-called straddle strategies around the debate dates, which is a bet that allows traders to profit from volatility.

Bonds

After the June debate, the probability of Trump winning in the prediction market increased. At the same time, long-term US government bonds are under pressure as traders adjust their positions to counter Trump's potential tax and trade policies that could cause inflation, resulting in a steep yield curve.

US government bond yields spiked after the first presidential debate.

Bond observers on Wall Street rare agree that regardless of who wins the November election, the US fiscal outlook will only worsen in the coming years, and the composition of Congress will be critical in determining spending plans.

Although US government bond yields have declined since June due to expectations of an imminent interest rate cut by the Federal Reserve, investors will still closely monitor any insights from Trump and Harris regarding fiscal plans. Concerns about deteriorating debt and deficit prospects could accelerate the steepening of the yield curve this year.

Forex

The US dollar strengthened against the Mexican peso during the first presidential debate.

In addition, Trump's broad stance on the value of the US dollar and Harris's position on this issue are crucial for investors.

Wall Street strategists generally believe that Trump's tariff policy will support the US dollar at least in the short term. But Trump also stated that this world reserve currency is too strong. How he balances these conflicting ideas, and whether he mentions pressuring the Fed to cut interest rates more actively, may drive volatility in the foreign exchange market after the debate.

Editor/ping