Financial markets around the globe have been fluctuating wildly since vote counting in the US presidential election began on Tuesday, as investors' predictions of a landslide victory for Democrats grew ever more unlikely.

Read more: Was the US election about the economy or not?

A tighter-than-expected race has traders nervous that a lengthy legal battle could follow, especially after President Donald Trump tried to claim victory while millions of votes were still uncounted. The president threatened to take the matter to the Supreme Court.

"With Donald Trump already claiming victory even though millions of votes are still uncounted, investors may have to belt up and brace themselves for some volatile sessions of trading ahead," Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, told AFP.

Markets had heavily favored a win by Democratic presidential candidate Joe Biden in the days leading up to the election after national opinion polls positioned him ahead of Trump. The outcome in key battleground states, however, was less certain.

Read more: Trump and the US economy: What can he take credit for?

US rises, Europe flipflops while Asia keeps cool

Visions of a landslide Democratic victory began to dissipate overnight, with stock markets reflecting the shift. European markets opened sharply lower on Wednesday after Trump said he would involve the Supreme Court, but rallied again marginally as Biden took a slim lead in the key state of Wisconsin. US equity futures initially rose as a Trump victory proved more likely, then fell again following the threats before slowly recovering.

European markets countered Tuesday losses with modest gains on Wednesday.  Germany's DAX gained just 0.1% after opening on Wednesday while the CAC 40 in Paris rose 0.4% and the UK's FTSE 100 went up 0.3%. By the end of trading, the DAX was up 1.7%, with the CAC 40 up 2.2% and the FTSE 100 up 1.5%. 

Stock markets in the Asia Pacific region, meanwhile, had a relatively strong opening amid the uncertainty. Tokyo's Nikkei 225, Seoul's Kospi, and India's Sensex advanced 1.7%, 0.6%, and 0.9%, respectively. While the Hang Seng index in Hong Kong was down 0.2%, Shanghai's SSE Composite went up the same amount. The Nikkei closed out the day 1.7% higher and MSCI's largest index of Asia-Pacific shares outside Japan showed a 0.4% gain.

US markets also woke up hopeful. The Dow Jones Industrial Average climbed 0.9% after opening Wednesday morning then finished the day up 1.3%, building on gains from 2% made on Tuesday. The S&P 500 opened 1.11% higher than the day before then finished up 2.2%, while the Nasdaq Composite gained 3.9% on Wednesday. 

Traditionally Democratic policies, like higher taxes on corporations and greater regulatory oversight, are generally less attractive to investors than those of Republicans. But the political uncertainty that has characterized the Trump presidency has some betting on restored stability were Biden to win. The former vice president is also likely to push a large coronavirus stimulus package in the US, potentially creating economic activity that would be attractive to investors.

'Markets hate uncertainty'

But Democrats now also seem less likely to win over the Senate from the Republicans. This could mean smaller-than-expected stimulus as well as general political deadlock for the next four years if Biden wins the presidency.

"The market hates uncertainty," Kiran Ganesh, an analyst at UBS bank, told AP. "And if we have continued uncertainty, then we're going to see prices fall, we're going to see volatility remaining high."

As of Wednesday midday, online betting markets were back to betting on a Biden win.

UK-based Smarkets Exchange said Biden had a 56% chance of winning, up sharply from 29% earlier Wednesday morning (CET) following the Democratic surge in Wisconsin, with 89% of votes tallied.