US Treasuries whipsawed and equity futures swung between positive and negative territory as presidential election results began to roll in.
Some traders warned of “air-pockets” in the market, predicting sharp moves because many fund managers are sitting on the sidelines and liquidity may be low.
An early sell-off in US government debt that pushed the yield on the 10-year Treasury above 0.9 per cent for the first time since June reversed after some early results suggested President Donald Trump outperforming expectations in the swing state of Florida.
The 10-year note was later yielding 0.84 per cent, down 0.06 percentage points. Yields rise as a bond’s price falls.
The dollar strengthened mildly alongside the rally gains in Treasuries, rising 0.3 per cent against the euro and 0.2 per cent against the British pound.
“The extent it looked like it was going to be a landslide is out the window,” said Peter Tchir, the head of macro research at Academy Securities. He added that volumes were relatively light and liquidity was thin in overnight trading.
“No market maker is in a position to take a lot of risk and that amplifies these swings. You see a buyer and all the sellers run because they want to know what the buyer knows.”
US stocks futures also oscillated. S&P 500 futures pointed to a 0.3 per cent gain in early trading in Asia, erasing an earlier gain of as much as 1 per cent but back in positive territory. Nasdaq 100 futures were up 1.3 per cent.
Money managers had broadly positioned themselves for a strong showing by Joe Biden at the start of the week, continuing shifts they had made when the Democratic presidential nominee had widened his lead in the polls in September.
Investors had been selling 10-year and 30-year Treasuries as part of a wager that trillions of dollars worth of stimulus could flood into the economy if Mr Biden wins the presidency and his party takes control of the Senate. That stimulus has been seen as fuelling growth and inflation, cutting the attractiveness of US government debt.
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US equity markets have moved dramatically in recent days. A rebound by the S&P 500 on Monday and Tuesday helped investors to recoup some of the losses they tallied over the previous five trading days, which proved to be the worst week for the almost $40tn US equity market since the sell-off in March.
The market’s recent confidence in a Biden win contrasted with earlier concern that a tighter race could lead to a long period of uncertainty, legal challenges to local tallies and even civil unrest.
Investors and hedge funds have zeroed in on several battlegrounds where results could come relatively early in the night and provide a signal as to how Mr Biden will fare against Mr Trump.
Singapore-based hedge fund group Dymon Asia Capital, for instance, said it was focused on Harris and Tarrant counties in Texas, a traditionally Republican state, according to a note seen by the Financial Times. A competitive showing from the Democratic candidate there would be seen as a sign that Mr Biden could win the election.
Dymon, set up by Danny Yong, said it expected market decisions to be made between 8pm and 10pm on the US east coast, shortly after a “data dump” of results from states such as Florida.
Goldman Sachs has advised its trading clients to focus on races in Florida, North Carolina and Ohio where vote counts are expected to happen relatively quickly. North Carolina was also the marginal seat that Democrats needed to take a majority in the Senate, Goldman said.
Additional reporting by Laurence Fletcher in London