Anxiety about the election had been running high Monday, as stocks sold off and bond yields fell. While concerns about Deutsche Bank and other factors started the selling, there's a clear nervousness building. Polls have tightened, and markets have been forced to consider the possibility of a Trump victory, after ignoring the election for months.
"He's campaigning as the outsider who wants to break some glass, and with it there's a 'damn the consequences.' I do think there's a fair amount of headline and uncertainty risk associated with a Trump presidency," said Ablin. "On the flip side, I think Clinton is the consummate insider, who will deliver more of the same. That would be more a certainty factor."
Before the debate started, Art Hogan, chief market strategist at Wunderlich Securities, said the faceoff should be the turning point for market interest in the election.
"That's when the market starts taking it seriously. Right now, the polls have it too close to call, and that's a change — two weeks of gradual momentum on Trump's side and two weeks of flattening out and no momentum on the Clinton side. You have a pivotal event. then we'll look at it (Tuesday), if it stays too close to call, that's a negative. The market wanted to price in an inevitable more-of-the-same victory," said Hogan.
Strategists say winner of the debate may win more for appearance and attitude than for substantive policy. Despite heated exchanges, neither candidate lost it. Clinton often smiled and Trump maintained a cool intensity.
"It's going to become a factor for financial markets," said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management. Schlossberg said the debate would not favor the candidate who has the best intellectual argument about policy, but the one who ended up being the best "gladiator."
"It depends on the intensity of the win or loss. I actually think they're going to fight to a standstill. … If he trips up badly, the dollar would rally. That would give the market something more certain. If she trips up badly, I think the dollar could really take a hit," he said.
Analysts said the worst outcome for markets Tuesday might actually be if the debate is a draw, leaving the close call election still a close call.
"The most likely outcome is inconclusive. Each of them have their own points they make and in the end, both of them come up damaged to some extent," said Jefferies money market economist Tom Simons. "I don't really see an outcome where one comes out cleaner than the other because they're both going for blood."
There has been some reaction across markets to the two candidates, but so far the broader U.S. stock market has not really traded in response. Biotech stocks have shown a negative correlation to Clinton's probabilities because of her attacks on drug pricing. For Trump, the Mexican peso
and stock market have both moved lower when he does well or calls out Mexico, due to his anti-immigration and anti-NAFTA policies.
Cardinal Capital Management's Patrick Kernan, who trades S&P 500 options at the CBOE, said he's noticed since the middle of last week a bigger move by investors to hedge for an increase in November volatility.
"Basically it would be November options [that] people are buying post-the-election and selling October. What it's saying is it feels like there's going to be a lot more volatility post the event," said Kernen. "It feels like they're concerned. It's the 'Oh gosh that can really happen!' trade."
On Monday, stocks fell with the S&P 500 losing 18.59 to 2,146. The dollar weakened and the dollar index was at 95.30 in late trading. Oil moved higher as oil nations meet at an energy conference in Algiers this week, and gold also gained.
"As we approach this first debate, and I look at the market, the market is a bit pensive. If it's perceived Trump wins the debate tonight you might see some support in the gold market, some buying in U.S. bonds and a stronger dollar, just because of the uncertainty," Jim Wyckoff, senior analyst at Kitco, said before the debate. "It didn't matter last week, but this week it does."
But the views on what the dollar might do vary. Already, traders are talking up speculators moving into the yen to hedge against a Trump victory.
According to Brown Brothers Harriman chief currency strategist Marc Chandler, the anti-NAFTA sentiment has also weighed on the Canadian dollar.
"I do think there's a knee-jerk reaction. A Trump victory is bad for stocks, bad for the dollar. For the dollar, what happens after cooler heads prevail is a different story," he said.
Both candidates are expected to discuss infrastructure spending, and that would be perceived as positive for the economy and take pressure off the Federal Reserve to continue heavy doses of monetary policy. That could be a dollar positive.
Some strategists say Trump's tax policy could actually be better for the stock market because it lowers the corporate rate and companies with cash overseas would be given an opportunity to repatriate it. But the initial reaction is one of fear.
"If she wins, we'll get a rally (Tuesday)," said Ablin. He and others likened a Trump win on Election Day to be potentially similar to the response to the Brexit vote, when the U.K. opted to get out of the European Union last June.
"We could see a Brexit type of reaction — down dramatically, then kind of rebound back when people come to their senses and see he's not going to tear the whole place apart," said Ablin.
"Nothing really fundamental will change. Presidents don't take office to shut companies down and to get rid of their workers. Their job is to enhance the economy and grow," he said.
But one of the big worries about Trump is what's hitting the peso and the Canadian dollar — fears of a trade war starting with America's closest neighbors.
Besides the debate aftermath, markets Tuesday will have several economic reports. S&P Case-Shiller home prices are reported at 9 a.m. ET; market services PMI is at 9:45 a.m.; consumer confidence is at 10 a.m. Fed Vice Chairman Stanley Fischer speaks at 11:15 a.m. at Howard University.