Banks and brokers prepare for tumult after US election

Big global banks, including Morgan Stanley, JPMorgan Chase and Goldman Sachs are bracing for potential tumult on financial markets after Tuesday’s US election.

As the outcome of the most bitterly fought US presidential elections starts to roll out by Wednesday in Asia, the regional markets will the first to trade on the results. As a result, Asia-focused banks HSBC and Japan’s Nomura Holdings Ltd are among institutions boosting staff levels, while others are raising the margin requirements for trading to cope with a possible spike in volume or volatility.

Bank preparations ahead of the election reflect their experience following Britain’s shock vote to leave the European Union in June, when the S&P 500 fell 3.6 per cent the day after the poll. In the US, Morgan Stanley told staff to consider using stop-loss orders, an automated trading mechanism that sells an investor’s position as soon as a stock hits a preset level, if the result causes trading volumes and volatility to spike. The bank also told advisers in its wealth management unit to prepare for election-related conversations with clients and pointed them to relevant pieces of research, according to a November 7th memo.

Extreme swings

Traders expect US stock prices to swing by about 2 per cent in either direction on Wednesday, the day after the election, based on the price of S&P 500 index options. Options on the PowerShares QQQ Trust Russell 2000 ETF, are pricing similarly large swings before the week is out. Some banks are projecting a more extreme drop in the event of a victory for Republican Donald Trump, with Citigroup estimating a Trump victory could trigger a 3-5 per cent sell-off for the S&P 500.

US stocks rose on Monday as Democrat Hillary Clinton’s prospects brightened after the Federal Bureau of Investigation said it would not press criminal charges related to her use of a private email server while secretary of state. Investors have tended to see Clinton as a more status-quo candidate, while Trump’s stances on foreign policy, trade and immigration have unnerved the market.

The “market pretty much told you who was going to win today”, said one capital markets official at a major bank who was not planning any extraordinary staffing measures. Another official at a rival bank said Monday’s 2.2 per cent rally in US stocks had lowered Wall Street’s collective angst over the election from “Defcon 4 to Defcon 2” referring to the US defence department’s levels of alert.

– (Reuters)