Stocks rise, Treasuries dip as markets await US election outcome

By Koh Gui Qing, Lawrence White

NEW YORK (Reuters) -World stocks rose and Treasury yields retreated from early highs on Tuesday as markets awaited early indications of the outcome of a knife-edge U.S. presidential election, with only currency markets showing some jitters.

Overnight implied volatility options for euro/dollar spiked to the highest level 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 Kamala Harris.

The VIX index of U.S. stock volatility, known as Wall Street's fear gauge, hovered at 20.5, down 7% from Monday but up from 15 in September. That said, it remains at half the level experienced in the 2020 presidential election in a sign that markets remained relatively sanguine.

"I'm hopeful that we'll see clues pretty early. I believe polls close in Georgia and North Carolina at 7:30 p.m. (ET/0030 GMT on Wednesday), and both are states that count quickly," Christy Setzer, a Democrat strategist, said in the?Reuters Global Markets Forum. "So much of their states' votes are already in, so there's a smaller amount of Election Day voting."

MSCI's gauge of stocks across the globe climbed 1.1%. On Wall Street, the S&P 500 Index rose 1.2%, the Dow Jones Industrial Average added 1%, and the Nasdaq Composite jumped 1.4%. [.N]

"The polls remain neck and neck even as some recent polling has suggested that Harris has gained the upper hand," analysts at TD Securities said. "Prediction markets have swung wildly on the updated polling, but a Red Wave (favoring Republicans) remains the most likely outcome priced into markets followed by Democratic President and split Congress."

The 10-year Treasury yield pared earlier gains and slipped to 4.2888%, retreating from a four-month-high struck last week. [US/]?

Yields spiked higher earlier even as investors widely expect the U.S. Federal Reserve to cut interest rates by 25 basis points when policymakers meet this week. The jump in yields followed data from the Institute for Supply Management that showed U.S. services sector activity unexpectedly accelerated in October to a more-than-two-year high, as employment strengthened.

The two-year Treasury yield added 2 bps to 4.1972%, also near a three-month-high hit last week.

"Investors are braced for turbulence in the Treasury market, even allowing for the big moves that we've already seen in it recently," said John Higgins, chief markets economist at Capital Economics.?

The choppiness is not surprising, Higgins said, given "the contrast in the protagonists' policy platforms."

In general, investors have interpreted Trump's trade policies to be more protectionist and inflationary.

The 10-year Treasury yield has climbed 63 basis points since the Federal Reserve cut interest rates by 50 basis points on Sept. 18.

Europe's benchmark STOXX index was flat, while MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.9%.

Currencies, which unlike shares trade around the clock, saw more action, albeit offering only scattered and contradictory indications of which candidate investors were betting on.

The dollar, which eased as traders made final tweaks to positions, bought 151.58 yen and changed hands at $1.0285 per euro. [USD/]

"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 3.3% to about $70,077, with Trump viewed by analysts as enacting more favorable policies for cryptocurrencies than Harris.

"Ultimately the U.S. election comes down to this - whether the U.S. 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)," J.P. Morgan analysts said in a note. "In short, a vote for stability or change."?

BRACED

China is seen on the front line of tariff risk, and its currency in particular is trading on tenterhooks with implied volatility against the dollar around record highs.

The yuan hovered at 7.1047 per dollar, while Chinese stock markets surged to almost one-month highs as investors expect a meeting of top policymakers in Beijing this week to approve local government debt refinancing and spending.

China's blue chip CSI300 jumped 2.5% and Hong Kong's Hang Seng rose 2.1%. [.SS]

The Australian dollar barely reacted after the central bank held rates, as expected, with all eyes on the U.S. election, and the Aussie was last marginally firmer at $0.6614.[AUD/]

Euro zone bond yields edged up, with Germany's 10-year bond yield climbing nearly 4 basis points to 2.431%, a little below last week's three-month high of 2.447%.

Oil held sharp overnight gains on delays to producers' plans for increased output, leaving benchmark Brent crude futures at $75.62 a barrel after a 3% rise on Monday. [O/R]

(Reporting by Lawrence White in London and Tom Westbrook in Singapore; editing by Shri Navaratnam, Christina Fincher, Mark Heinrich, Alexandra Hudson, Will Dunham and Leslie Adler)