Global markets rocked as traders see pathway for Trump victory

Global markets were thrown into disarray Tuesday as early results from the U.S. election raised the possibility that Donald Trump may prevail over Hillary Clinton in the race for the presidency, shocking traders who had focused on polls in recent days showing the opposite.

Panicked traders rushed to unwind bets they piled into over the last two days amid predictions Clinton would sweep to an easy victory. Futures on the S&P 500 plunged more than 4 percent, while Mexico’s peso—a barometer for investors’ perceptions of the American vote—sank by the most in eight years. Safe-haven demand pushed the yen and gold up by more than 2 percent. Yields on 10-year Treasuries slid to a two-week low.

“It’s quite scary,” said Nader Naeimi, the Sydney-based head of dynamic markets at AMP Capital Investors Ltd., which manages about $125 billion. “The slightest move towards Trump moved the market very quickly. The slightest change in the odds is amplifying market moves and this just shows there’s a lot at stake. I don’t think it’s a done deal yet; at the end of the day we still don’t know the winner.”

A Trump victory, buttressed by electoral gains from Florida to North Carolina, had been portrayed by analysts as having the potential to unhinge markets that had banked on a continuation of policies that coincided with the second-longest bull market in S&P 500 history. In the market’s last major political shock, Britain’s vote to leave the European Union, the S&P 500 dropped 5.3 percent in two days.

Most polls showed Democratic candidate Hillary Clinton ahead of Trump going into the vote and the first four states to be called were in line with forecasts. At stake is leadership of the world’s largest economy at a time when America is divided over immigration, trade and the country’s role in the wider world. Websites that take bets on the presidential victor had put the Democrat’s odds of winning at 80 percent or more prior to the election.

Declines in futures the night of the Brexit vote triggered the Chicago Mercantile Exchange’s limit down price curbs. The rules come into effect when S&P 500 contracts decline 5 percent from a reference price that is calculated in the last 30 seconds of trading on the previous day.

E-mini futures on the benchmark gauge settled Tuesday at 2,135.12, implying a trigger at around 2,029. The curb means the contract cannot trade at a lower price for the remainder of the overnight session.

“Trump is getting a greater portion of the results than the polls showed going into tonight,” said Chad Morganlander, a money manager at Stifel, Nicolaus & Co. in Florham Park, New Jersey, where he helps oversee about $172 billion. “This is going to be a long night and investors should be prepared for a tremendous amount of market instability over the next several hours.”

The walloping in stocks will test the reliability of hedges built up over the last month as the election neared. Some of the biggest were tied to swings in the CBOE Volatility Index, the options-derived gauge of market stress which saw its longest streak of gains ever last week. Volume in VIX futures have been at or close to records in past weeks, a sign institutional investors took steps to mitigate a potential plunge.

“Hedges are pretty tricky when it’s such a binary outcome of results, meaning that the initial reaction for a Trump victory was clearly going to create some volatility around the equity market,” aid Mark Heppenstall, chief investment officer of Penn Mutual Asset Management which oversees $20 billion. “It’s always hard to have effective hedges when there are expected outcomes.”

About 700,000 e-minis contracts on the S&P 500 expiring in December have changed hands since the futures market started trading at 6 p.m. New York time, 22 times the average volume at this time of the day over the past month, data compiled by Bloomberg show.

“Everything thing we’ve been reading suggested you’d see a Clinton win. Every incremental vote that makes that outcome more difficult, that’s a vote towards a lower market,” said Mike Bailey, director of research at FBB Capital Partners, which oversees $900 million. “As the race looks more competitive, that’s going to weigh on equity prices as we head into tomorrow.”