Markets bracing for significant volatility going into the US elections

The latest news headlines seem to favour a Harris win and markets have decided to trim down the Trump trade somewhat. Yesterday, the 10Y UST yield fell by almost 10bp on the day, down to 4.3%. The front end of the UST curve remains more anchored, showing that most election positions can be found at the back end of the curve. But the race is still too close to call and we can expect a lot more rates volatility once the election outcome becomes clear. The implied rates volatility from the MOVE index is now on par with the inflation spikes in 2022 and the 2008 Global Financial Crisis.

The big moves in US rates did not spill over to European rates. A lower chance of a Trump presidency is a relief to the eurozone and should be net positive for bond yields, but at the same time lower UST yields push in the opposite direction. Spanish and Italian manufacturing PMIs also didn’t manage to budge rates. All eyes are on the US elections and until the results are in we expect little impact from data releases. We must also consider a scenario where the voting results are not clear-cut and the winner is only announced later this year, leaving markets in limbo for longer. 

Broader risk-off episode in Europe possible under Trump win

For euro rates, we could see a broader risk-off move dominating in the case of a Trump win, with flows towards Bunds and longer-duration bonds as a result. European government bond spreads versus Bunds could widen, although the extent may be more limited than in other risk-off events. Germany is deemed one of the more exposed economies to potential trade tensions with the US, and thus Bunds may not benefit as much from safe-haven flows as usual. This may also be a supporting factor helping the Bund ASW spread narrow over the past few weeks.

The spillovers to the eurozone may also depend on whether Trump manages to secure Congress. In the case of a clean sweep, Trump may prioritise domestic policies, such as taxes, before implementing tariffs. In such a scenario, the economic impact on the eurozone may be delayed, reducing the near-term impact.

Tuesday's events and market view

The US election takes centre stage today, although even in the best-case scenario some clarity about who leads the race will not be available until Wednesday morning. More likely it will take longer given the closeness of the race. Still, there may be enough headlines to move sentiment around. In this environment, a data release such as the ISM services might go under the radar, though it would also be unlikely to move the needle concerning the market expectations for this week’s FOMC meeting – those sit firmly on a 25bp cut. The consensus for the ISM is a bit softer at 53.8, but the main focus could be the employment component that had dipped back into contractionary territory already the last time around.

In primary markets, Austria is selling 10y and 20y RAGBs for €1.7bn in total. The US Treasury sells US$42bn of new 10y notes.  

Markets

US market moves suggested investors reduced the ‘established Trump-trade’ to position to a more neutral one with a survey showing Harris potentially taking the lead in Iowa driving the move. After rising substantially on Friday, US yields faced a material setback in Asia and most of this this was maintained later in the session. US yields declined between 4.5 bps (2-y) and 10.3 bps (30-y). However, with the broader picture still pointing to a close neck-and-neck race, it’s useless to draw any conclusions. It probably was nothing more than the erratic swings one can expect in thinned market conditions ahead of major event risk. A $58 bln US Treasury auction was awarded at 4.152%, slightly above the WI bid (4.143%), slightly reinforcing the underperformance of bonds at the short end of the US yield curve. German yields changed between +1.7 bps (2-y) and -4.9 bps (30-y).

EMU interest rate markets after last week’s higher than expected EMU Q3 growth and CPI data are coming to understand that it won’t be evident for the ECB to accelerate the pace of rate hikes to a 50 bps step at the December meeting. The dollar copied the election-related setback in US yields. After closing at 104.28 on Friday, the DYX index tested the 103.6 area to finish the day off the intraday lows at 103.88. EUR/USD filled offers north of 1.09, but later also returned part of the intraday gains to close at 1.0878. Similar story for USD/JPY (close 152.13 from 153.01 on Friday). US equities lost modest ground (S&P 500 -0.28%). Brent oil tries to regain the $75 bp handle. After outperforming the euro on Friday, sterling yesterday hovered around the EUR/GBP 0.84 pivot as markets look forward to the BOE’s assessment on fiscal policy at Thursday’s policy meeting/monetary policy report.

Asian equities trade mixed to positive this morning with China outperforming. The China Caixin Services PMI improved more than expected from 50.3 to 52.0. The outcome supports confidence that recent stimulus measures might help a rebound in domestic demand. However, the US election also remains a big source of uncertainty for the overall performance of the Chinese economy going forward. On ‘global markets’ US yields are trading marginally higher (<1 bp) as investors are counting down to the outcome of the US elections. The dollar is holding little changed (DXY 103.9). In a ‘normal context’ one would today mention the US services ISM as interesting last input for this week’s Fed meeting, but investors won’t feel inclined to adapt positions on the basis of whatever important eco data series at ahead of the election event risk. Later this session, the US Treasury will sell $42 bln of 10-y notes.

News & Views

The Reserve Bank of Australia remains one of the hawkish outliers amongst central banks. The central bank kept its policy rate unchanged at 4.35% this morning as underlying inflation (3.5% Y/Y in Q3 2024) remains too high and isn’t expected to sustainably return to the midpoint of the 2-3% inflation target range until 2026. This reinforces the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out. The forecast is backed by a judgement that aggregate demand remains above the economy’s supply capacity, the mere persistence of core price pressures, surveys of business conditions and ongoing strength in the labour market. Weak output growth is expected to recover from H2 2024 onwards, but that outlook remains highly uncertain. Australian money markets put the probability of a first rate cut in February, when new forecasts are available, at roughly 40%. A full 25 bps rate cut is only discounted by the May 2025 meeting. AUD/USD is marginally stronger this morning at AUD/USD 0.66.

Data from the British Retail Consortium (BRC) show that total UK sales increased by 0.6% Y/Y in October, down from 1.7% in September and below 1.4% consensus. Food sales were 2.9% higher Y/Y with non-food sales 0.1% Y/Y lower. The disappointing result can be partly explained by a later October half-term in England, mild weather (deterring spending on winter clothes) and by uncertainty before the budget and rising energy bills. The promotional weeks around Black Friday will be the first real test of post-budget consumer sentiment.

Source: ACTIONFOREX

The week started on a cautious note in Europe and the US as today’s US presidential election looks very close to call and could eventually result in a tight – and even a contested outcome. As such, the major risk today is not a Harris or a Trump win, but it’s the reality that a Harris win could be heavily contested by Mr, Trump and lead to violence and chaos, and more uncertainty than necessary and hit sentiment.

But apart from that, the fact that Trump and Harris have different economic and political agendas, different priorities and the fact that there are sectors that could see a better lift under one or the other presidency may not change the overall performance of the long-term stock market, and not even the concerned sectors…

Did you know that clean energy outperformed traditional energies by 43% under Trump’s presidency? And, wait, traditional energies outpaced clean energies by 53% per year under the Biden presidency.

And zooming out, a quick glance to the S&P500’s performance a year following a US election has always been positive since 1984, no matter if the US was led by a Republican or a Democrat, except in 2000’s tech bubble.

Nvidia in, Intel out, Apple sold

Yesterday saw Nvidia briefly dethrone Apple as the world’s most valuable company, as the world’s AI darling rose on celebration of its inclusion into the Dow Jones index effective from Nov 8th – as a replacement to Intel that was sitting there for the past 25 years. The switch was clearly perceived as AI’s progress within the tech industry, and its increasingly dominant position. As per Apple, the news that Warren Buffet’s Berkshire Hathaway reduces its holding by another 25% didn’t help boost appetite. But hey, Apple remains the firm’s biggest holding, still, as Buffet’s team prefers to sit on a colossal amount of cash – apparently put off by high market valuations of the moment.

Speaking of valuations, the S&P500 kicked off the week on a slightly negative note, as I said, but near an ATH level, as it is the case for Nasdaq 100 and Dow Jones. The US yields, on the other hand, fell and the dollar was hit by a wave of realism that the gap between Harris and Trump was much tighter than what the prediction and broader markets had been pricing in over the past few weeks. The latter gives an idea about the type of a relief rally that we could see in case Harris wins and Trump accepts.

As such, the EURUSD – which is seen as one of the most vulnerable major currencies to a potential Trump victory due to a tariff threat on the EU – is consolidating a touch above the 1.09 level. A Harris win could send the pair above the 1.10 psychological mark, but a Trump win or a contested outcome could move capital to the US dollar.

And in case of a chaotic election day and a contested outcome, gold and Swiss franc would be my go-to places to let the dust settle.

Australia and China

The Reserve Bank of Australia (RBA) maintained its policy rate unchanged at a 13-year high, citing that headline inflation has declined but that the underlying inflation – near 3.5% – remains too high to make a decision to cut the rates. The AUDUSD rebounded on the back of the divergent Federal Reserve (Fed) and RBA policy outlook.

The Aussie probably got a boost from some good news from China as well – its biggest trading partner – as the Caixin’s PMI index showed a stronger-than-expected rebound in activity in October, also supported by a rebound in factory output. To top it all off, news that China is now considering a plan to lift the local governments’ debt ceiling and to shift some of their hidden debt onto their formal, official financial statements to reduce financial burden of the local governments and give more transparency to the picture, also helped. The CSI 300 is up by more than 2% this morning and copper futures are gaining momentum to the upside.

Is this time the charm? Maybe, but enthusiasm over China was not enough to further boost oil prices this morning. The barrel of US crude is slightly lower at the time of writing, near $71.50 level, after having jumped more than 3% on Monday, on news that OPEC is considering to delay their output increase by a month – or more. Rumours that the tensions between Iran and Israel could rise again should also provide some support to the short-term tactical bulls above the 50-DMA, near $71.30, and above the critical $70pb level, but oil bulls need a robust Chinese recovery, and perhaps a longer restriction output from OPEC to win over the medium-term bears. The key resistance to the actual bearish trend, supported by Chinese weakness and ample global supply, stands at $72.85pb, the major 38.2% Fibonacci retracement to the July – September selloff.

Source: AP

Source: Euronews