Market Quick Take - November 4, 2020

Macro 6 minutes to read
John Hardy

Head of FX Strategy

Summary:  As US Election Night results roll in, two things are very clear. The first is that the mainstream polling industry in the USA has lost all credibility as Trump has performed far better than polling averages suggested was possible. The other is that the electoral map could go down to the wire and beyond with a very close result, raising the odds of the most feared scenario of a contested election and split Congress.


What is our trading focus?

Please note: as of this writing the US Election is too close to call – we will of course know more as the vote tally progresses, but the vote margin may remain too close for the apparently losing side to concede and further controversy on the status of mail-in votes could mean uncertainty stretching over days or more. We are hosting a special live conference later today at 12:30 GMT, and you can sign up here.

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Nasdaq 100 futures are up 2% compared to 0.4% for S&P 500 futures as the US election is much closer than previously expected and the senate will be close lowering the probability of a big fiscal deal. It looks like the market has increased its probability for a Trump victory, but the main point is that it is too close to call for now and that equities due to the underlying volatility seems to be the preferred speculation instrument and thus we should be careful about the interpretations. VIX Nov futures were trading as lows as 30 earlier in the session but is now around 31.60 indicating that the market is pricing in a lot of volatility which is the contested election outcome.

USD – the US dollar was shocked back to the strong side as the evidence accumulated that Trump was vastly outperforming the polling averages coming into election and was clearly set to take Florida, although other key swing states are still hanging in the balance. If the results continue to tilt in Trump’s favour, especially an outright victory, this would continue to support a firmer US dollar, which could break considerably stronger versus the EUR (note key 1.1600 area in EURUSD) and the AUD (the 0.7000 area.). If market uncertainty in general picks up and risk sentiment goes more strongly negative suddenly on contested election fears, the USD is likely to remain relatively firm, but an even stronger Japanese yen is then a more material risk.

Commodities have so far seen a mixed reaction with Trump once defying polls and predictions as he maintains a narrow path back to the White House. Gold has traded within a 33-dollar range and is currently down by 10 bucks. Crude oil meanwhile trades higher for a third day driven by a combination of OPEC+ potentially delaying the January output hike, the API reporting a U.S. stockpile drop of 8 million barrels and potentially the market pricing in an oil sector supportive win for Trump. Silver is the biggest looser, currently down 2.3% as the reflation focus has faded with Biden’s prospects. A volatile day undoubtedly awaits with the result currently too close to call.

Treasury yields rose as the market priced a Biden clean sweep, but fell sharply as election narrowed (10YUSTNOTEDEC20, 30YUSTBONDDEC20). 10-year Treasury yields rose to 94bp as the market was skewed towards a Biden win, but quickly fell to 80 bps as President Trump defied polls in key states. 30-year Treasury yields rose 10bps to test their upper channel and retreated to touch the lower trendline. We might see more fly to safety as investors will be forced to unwind large short position in Treasury future. A Flattening of the yield curve is more likely than a steepening until there is no clear winner.

Alibaba (BABA:xnys or 09988:xhkg) - shares down 7% in Hong Kong trading as the Ant Group IPO has been suspended by regulators as Ant Group has been told that it will be subject to rules governing capital holding companies. The Ant Group IPO was expecting to raise $35bn being the world’s largest IPO ever and reaching a market value close to $315bn. While a shock in the short-term we believe that Ant Group will comply with the Chinese government and although uncertain timeline the IPO will go through. Read our initial take here.

What is going on?

US Election result still being tallied: the US Election result is very tight, and no outcome is yet clear and may not be today. It emerged rather quickly on Election Night that Florida would go to Trump and likely by a wider margin than in 2016 on the strength of Cuban-American shift to Trump. The markets reversed course from what seemed to be the pricing of a Blue Wave scenario for the Democrats on this. But later in the night, patterns elsewhere have shifted in a slightly different direction, with Georgia still very up in the air as the final several percent of the votes are being tallied there – and the same is the case in Arizona. And slow-counting Wisconsin, Michigan and Pennsylvania are also close as Democratic leaning mail-in votes are yet to be tallied in some cases. Senate control is likewise an unknown as of this writing but will be a close final result.

What we are watching next?

US Election vote count – will any clarity emerge and when?  The critical first step for the coming hours is to understand first, the margin of difference in the key remaining uncounted battleground states in the US, including Michigan, Wisconsin, and the likely difference makers here: Georgia, Arizona and Pennsylvania. If Pennsylvania is the last state that is the difference between a Trump and Biden win, and the margin of difference there is razor-thin we may have to settle in for a long wait and an explosive decision from the courts on the status of that state and thus the election. Trump is already making noises about a win on Twitter even as the outcome is not sufficiently clear for him to do so and in a live press conference is making noises about fraudulent activity in the vote counting.

Q3 earnings season continues this week with more focus on Europe. This morning we have earnings from BMW which are in line with estimates, and Ahold Delhaize raises its FY outlook and increases its shares buyback programme. Today the most the interesting earnings release will come from MercadoLibre, the equivalent to Amazon.com in South America.

  • Today: SoftBank, Qualcomm, MercadoLibre
  • Thursday: AstraZeneca, Zoetis, Daikin Industries, Nintendo, Linde, Cigna, Duke Energy, Booking Holdings, T-Mobile US, Enel, Square, Uber Technologies, Alibaba Group, Bristol-Myers Squibb, Dominion Energy, Becton Dickinson, Regeneron Pharmaceuticals
  • Friday: Toyota Motor, Allianz, NTT, CVS Health, Enbridge
  • Saturday: Berkshire Hathaway

Economic Calendar Highlights for today (times GMT)

  • 0815-0900 – Euro Zone final Oct. Services PMI
  • 1315 – US Oct. ADP Payrolls Change
  • 1330 – US Sep. Trade Balance
  • 1500 – US Oct. ISM Services
  • 1530 – EIA's Weekly Crude Oil and Fuel Storage report

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