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UPDATE 4-Trump's positive COVID-19 test throws markets pre-election curveball

(Updates with latest market action)

LONDON/NEW YORK, Oct 2 (Reuters) - Investors already skittish ahead of U.S. elections in November now have another thing to worry about: the president’s health.

News of Donald Trump’s positive coronavirus test on Friday triggered a decline in oil prices and stocks.

U.S. equities cut some of their losses by the end of the volatile session as investors digested the news and weighed the prospect that lawmakers would agree on a long-awaited coronavirus relief 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, more than 207,000 of them in the United States.

“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 United States, the benchmark S&P 500 stock index ended down about 1% while the tech-heavy Nasdaq dropped 2.2%. MSCI’s gauge of stocks across the globe slipped 0.7%. Oil prices fell more than 4%.

Markets may have been somewhat 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 on Tuesday night.

“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 continue 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 fueled 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 edging up to 27.63 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 impact of his diagnosis, the gap between October and November VIX futures narrowed. VIX futures reflect volatility expectations in the 30 days following their expiration, so October futures capture sentiment regarding the Nov. 3 election date.

In currency markets, implied volatility gauges for the yen over the next month rose to a four-week high of 7.6 vols , signaling more choppy trading ahead.

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 Trust Bank in Tokyo.

Reporting by Saikat Chatterjee and Lewis Krauskopf; Additional reporting by Dhara Ranasinghe, Gertrude Chavez-Dreyfuss, April Joyner and Stephen Culp Editing by Jonathan Oatis and John Stonestreet

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