One of the first lessons that every trader learns is to respect the old axiom “markets do not like uncertainty.” There is a lot of truth in that statement, as anytime guesswork and financial risk collide, chaos is the result.
In the arena of live futures trading, uncertainty can be unforgiving. The very nature of futures reinforce this notion. Assets are valued according to what they will be worth at a later date, instead of what they are worth today. Any event that threatens the market’s interpretation of what is probable will shake things up dramatically.
Elections are primary catalysts for futures market turbulence. No matter whether the vote determines a head of state or social referendum, it’s likely to influence markets before, during, and after the process is completed.
The Calm Before the Storm
Popular sentiment toward an election’s potential outcome may influence a related futures market in any number of ways. However, the most common phenomenon is for markets to enter a period of consolidation amid hesitance regarding the forthcoming result.
Here are several characteristics typical of a futures market in the immediate run up to an electoral decision:
- Limited traded volumes: Market participants are less inclined to assume any additional risk ahead of possible turbulence, thus reducing volume.
- Noncommittal tone: Trends are infrequent while the eventual result remains unknown. Intraday volatility may periodically spike, but long-term investors and institutions are content to wait for the final verdict before committing to a position.
- Range bound markets: Trading ranges are typically moderate, a product of limited volumes and lack of institutional participation.
While every election is unique and has its greatest impact upon a specific collection of products, the hours or days ahead of the decision are a time of uneasiness for traders and investors. Often, a wait-and-see approach prevails, resulting in muted price action.
Riding the Wave
Futures markets are famous for their inherent volatility. Even more so as an electoral cycle concludes. As polls close and vote tallies are reported to the public, a probable result comes into focus. Through the use of an online futures trading platform, any market participant is able to buy or sell contracts in anticipation of the pending outcome.
Prominent elections have a history of bolstering pricing instability, creating wild swings in asset valuations. In the event that a surprise is in the making, futures markets are capable of reacting dramatically:
- 2016 U.K. vote for Brexit: British pound futures experienced incredible volatilities as the vote in favor of Brexit became certain. On June 24, 2016, British pound futures traded from an intraday high of 1.5009 to a low of 1.3246. Eventually, they closed down over 1200 ticks for the session, marking a historical crash of the pound sterling.
- 2016 U.S. presidential election: The upset victory by Donald Trump sent U.S. equities futures products into chaos. As the tone of the vote became public, DJIA futures plummeted 800 points under extreme overnight volume, before rebounding later in the session.
- 2017 French presidential election: The 2017 presidential election in France was held over a weekend, when futures markets were closed. However, on Sunday evening’s electronic open, the Euro traded heavily to the bull. From the previous Friday’s close of 1.0759, Euro Fx futures opened for trade at 1.0893. Euro backers were reassured by the appointment of Emmanuel Macron, the expected victor.
Volatility feeds volatility. As uncertainty grows, so does participation. If you are engaging the futures markets during a charged election cycle, being cognizant of all possibilities is crucial to balancing risk with reward.
The Key to Live Futures Trading
The impact an election may have on a futures market varies greatly and can be extremely unpredictable. Each election and market is unique, which means that accurately predicting outcomes and subsequent behavior can be a monumental task.
Being aware of politics, electoral cycles, and the general issues of the day is an important part of active trading. If you would like more information on how to approach uncertainty in the marketplace, check out the vast collection of live futures trading resources available at Daniels Trading.