By Saikat Chatterjee and Lewis Krauskopf
LONDON/NEW YORK (Reuters) - Investors already skittish ahead of U.S. elections in November now have another thing to worry about: the president's health.
Donald Trump's COVID-19 diagnosis triggered a drop in oil prices and an initial selloff in stocks on Friday.
U.S. equities were still volatile on Friday but had cut some of their losses in afternoon trade as investors digested that news and the prospect that lawmakers would agree on a long-awaited fiscal spending bill before the election.
Where investors go from here could rest on how Trump copes with a disease that has killed more than a million people around the world.
"This is a new uncertainty in a world which is mixed-up already, which is not the best," said Chris Bailey, a European strategist at Raymond James.
In the U.S., the benchmark S&P 500 stock index (SPX) was down 0.8% while the tech-heavy Nasdaq (IXIC) dropped 2%. Oil prices fell more than 3%.
Markets may have also been soothed by news that Trump's opponent, former vice president Joe Biden, tested negative for the virus after the two men met for their first debate earlier in the week.
"If you have the two nominees both infected with COVID, that would really throw another huge uncertainty in the election and what happens next," said Keith Lerner, chief market strategist at Truist/SunTrust Advisory. "We’ve never had something like that happen before."
If Trump's symptoms turn out to be mild and he recovers quickly, the Republican president could use the experience to project his image as a fighter in the campaign against Biden.
But investors might be more alarmed if the 74-year-old gets very sick and has to be hospitalized, as British Prime Minister Boris Johnson was in the spring, or the virus spreads to other members of Trump's administration.
The news fuelled the sense that investors are headed for a period of heightened volatility, with most agreed that markets will remain on edge for the foreseeable future amid uncertainty over the path of the pandemic as well as the election.
Volatility gauges rose, with the widely watched Cboe Volatility Index (VIX) edging up to about 27.50 points, from around 27 points on Thursday, after rising to nearly 30 points earlier.
The moves were nowhere as large as during the depths of market mayhem in March but, with only a month left before the election, Trump's news comes at a critical time.
In a sign of concerns regarding the political impact of his diagnosis, the gap between October
In currency markets, implied volatility gauges for the yen over the next month rose to a four-week high of 7.6 vols
David Arnaud, a fixed-income fund manager at Canada Life Asset Management, said that he had positioned for uncertainty in the coming weeks by increasing exposure to safe-haven assets such as the U.S. dollar, Japanese yen and U.S. Treasuries.
While MUFG strategists said Trump's diagnosis could strengthen his argument of opening up the U.S. economy if he recovers quickly, some like Saxo Bank say Biden's chances of a win had jumped, a negative for risky assets.
The news spread to betting markets. Betfair suspended betting on the outcome of the U.S. election on Friday, its website showed. Betfair had Biden's probability of winning at 60% on Wednesday after the first debate on Tuesday night.
Investors, who have driven a long rise in global equity markets, were already nervous given the uncertain prospects for more U.S. fiscal stimulus and a brief sell-off in high-flying U.S. technology shares last month.
"Whether it's Trump or Biden, the biggest problem is uncertainty. As long as we're uncertain about who will win the election, it is difficult for markets to truly settle," said Ayako Sera, market strategist at Sumitomo Mitsui (NYSE:SMFG) Trust Bank in Tokyo.
FX and equity volatility: https://fingfx.thomsonreuters.com/gfx/mkt/xegvbjwwkvq/FX%20and%20equity%20volatility.JPG