By Lewis Krauskopf

NEW YORK (Reuters) – Global investors were underwhelmed as Americans headed to the polls on Tuesday, ending a dramatic U.S. election cycle that has moved bonds, stocks and other assets in recent months and could further sway markets as the results become clearer. .

One of the most unusual elections in modern US history could have radically different implications for tax and trade policy, as well as American institutions, depending on whether Republican Donald Trump or Democrat Kamala Harris prevails.

The results could rattle assets around the world and lead to wide-ranging financial consequences, including for the outlook for the US debt, the strength of the dollar and a host of industries that make up the backbone of corporate America.

With polls showing a heat between the former president and the current vice president and control of the US Congress also at stake, investors are wary of any unclear or contested outcome that could fuel volatility stemming from any lingering uncertainty about the political context.

As votes begin to be reported Tuesday night, investors will focus on the number of counties across the country that could provide early clues about the winner. But many of the battleground states that will decide the race may not have significant results until at least late into the night.

“This is the most important election I’ve seen in my career,” said Mike Mullaney, director of global market research at Boston Partners, who has worked in investment management for more than 40 years.

“It’s going to be very bifurcated, with certain things happening under a Trump win and certain things happening under a Harris win,” Mullaney said.

The focus on the election follows a rally in stocks that has sent the S&P 500 to record highs in 2024, up about 20% year-to-date, driven by a robust economy, strong corporate earnings and interest rate cuts by the Federal Reserve.

On Tuesday, several measures of trader demand for protection against excessive overnight price swings in the foreign exchange market rose to their highest level since the November 2016 election.

BETTING IN VOLUNTEER MARKETS

However, betting on the outcome of the election had an influence in the fluctuating markets. Traders pointed to Trump’s gains in the polls and betting markets as a factor driving assets that could be swayed by his pledges to raise tariffs, cut taxes and cut regulations.

Those so-called Trump trades include declines in the Mexican peso, which could be hurt by tariffs, wild swings in Trump Media and Technology Group shares, and unrest in industries that could benefit from looser regulation, such as regional banks.

Treasury yields — which move inversely to bond prices — also rose as investors priced in higher potential inflation, another projected consequence of Trump’s policies.

However, a number of Trump trades were at least somewhat canceled on Monday after Harris edged Trump in a closely watched Iowa poll, while investors were on guard for further violent moves as markets react to the results.

“The market is being pulled and pushed in different directions here as investors try to price in a lot of unknowns around the election,” said Matt Miskin, co-chief investment strategist at John Hancock Investment Management. “In the next week we will get certainty; either it will strengthen this positioning or there will be a shake-up”.

Meanwhile, a Harris presidency will result in tougher regulations, more support for clean energy, and potentially higher taxes on companies and wealthier individuals.

“BLUE WAVE” SEEM LIKELY

Both Trump and Harris would likely need their respective parties to win control of Congress to change tax rates. A so-called “Blue Wave,” in which Harris prevails and Democrats win control of both the House and Senate, is an outcome that most investors see as unlikely.

“If Harris wins … she is now very likely to face a Republican-controlled Senate, which would leave most of her fiscal plans dead in the water,” analysts at Capital Economics said in a note on Friday.

Historical data shows that stocks tend to perform well at the end of election years, regardless of which party wins, as investors accept clarity about the political situation.

This year, however, some investors are concerned that the outcome will be too close to the call, increasing uncertainty for markets. Another concern is that the election will be contested, in a move similar to Trump’s efforts to overturn his loss to President Joe Biden in 2020.

While recent precedents for contested elections are few, investors are wary of 2000, when the race between George W. Bush and Al Gore was tied for more than a month because of a recount in Florida. During that time, the S&P 500 fell 5% as sentiment was also weighed down by unease about tech stocks and the broader economy.

Although the S&P 500 is only about 2.5 percent off its record high, stocks have grown more turbulent in the past week on mixed earnings reports from megacap tech companies and heightened election anxiety. The Cboe Volatility Index, known as Wall Street’s fear gauge, rose to about 22 after dipping below 15 in late September.

Unclear elections “are a big problem because that’s what we had in 2000,” said Matt Maley, chief market strategist at Miller Tabak. “What will he do this time with so much going on in the geopolitical arena?”

(Reporting by Lewis Krauskopf; Editing by Sandra Maler)