LONDON - Stocks were steady on Tuesday but implied volatility ratcheted up in currency markets in an early indication of the market frenzy to come, as the world awaits the outcome of a knife-edge US election.
Overnight implied volatility options for euro/dollar spiked to the highest since November 2016, as did those for the dollar-Mexican peso pair, in recognition that the latter could be hard hit by protectionist policies if Republican Donald Trump defeats Democrat candidate Kamala Harris.
Europe's benchmark STOXX index edged down 0.2 percent while MSCI's broadest index of Asia-Pacific shares outside Japan inched 0.7 percent higher, as stock markets held their breath ahead of Wednesday's open.
Currencies, which unlike shares trade around the clock, saw more action albeit still offering only scattered and contradictory indications of which candidate investors were betting on.
The dollar, which had eased as traders made final tweaks to positions, bought 152.46 yen and changed hands at $1.0879 per euro.
"They've priced what they think is price-able and that's that," said Westpac strategist Imre Speizer, adding that a clear win for Trump would lift the dollar, while a win for Harris would push it a little lower.
Bitcoin added 2.7 percent to about $68,884, with Trump viewed by analysts as enacting more favorable policies for cryptocurrencies than Harris.
Election day ends an acrimonious campaign jolted by assassination attempts on Trump and the withdrawal of President Joe Biden in favor of Harris, with polls showing the candidates virtually tied.
Markets are on edge about how Trump's protectionist trade policies in particular could stoke inflation and hit exports in the world's biggest consumer market with bonds and the dollar expected to move on the outcome of the election.
"Ultimately the US election comes down to this - whether the US electorate wants to vote for economic policy continuity, institutional stability and liberal democracy (Harris) or radical trade policy, a further retreat for globalization and strongman democracy (Trump)," JP Morgan analysts said in a note. "In short, a vote for stability or change."
The Australian dollar barely reacted after the central bank held rates, as expected, with all eyes on the election and the Aussie was last marginally firmer at $0.6614.
"Simply, if Harris wins, we like selling dollar/yen and buying AUDUSD," said a currency strategist at Citi. "If Trump wins, we like buying USD against EUR, SEK, and NOK."
Treasury markets, which have priced in a US interest rate cut for Thursday, held their ground in early European trading with 10-year US yields at 4.32 percent.
Eurozone bond yields edged up, with Germany's 10-year bond yield climbing nearly 2 basis points to 2.41 percent, a little below last week's three-month high of 2.447 percent.
Oil held sharp overnight gains on delays to producers' plans for increased output, leaving benchmark Brent crude futures at $75.24 a barrel after a 3 percent rise on Monday.
When US election results roll in after midnight GMT the focus will be on the battleground states of Georgia, North Carolina, Pennsylvania, Michigan, Arizona, Wisconsin and Nevada.
A winner may not be known for days and Trump has signaled that he will attempt to fight any defeat, as he did in 2020.
