Head of FX Strategy
Summary: Finally, it is US Election Day, and although many official pollsters suggest very high odds of a Biden victory and the Democrats retaking the US Senate, there are sufficient doubts on the outcome to make the election results a surprise to many. A contested election result tonight is rightfully seen as the most negative scenario, as it could drag out the uncertainty for weeks or longer.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - The broader US equity market rebounded yesterday, with the S&P 500 steering away from the key 3,200 area for now, while the Big Tech heavy Nasdaq 100 gyrated and closed near Friday's low close for the cycle and remains close to the big 100-day moving average near 11,100. Election outcomes will inevitably trigger the next move and could mean considerable volatility, with the most negative scenario and clear threat emerging tonight that we face a contested election scenario that stretches uncertainty over weeks or longer.
Stoxx 50 (EU50.I) - the rebound trade in European equities continues this morning with the main index futures up 5% from Friday’s lows. No real specific news is driving the rebound, so our view is that is of more technical character. Traders might be betting on more fiscal and then the pre-committed QE expansion by ECB on the December meeting. At the same time governments are stepping up their efforts against Covid-19 and the bet might be that things will not be much worser from here as restrictions will most likely bend the curve again.
EURUSD and USDJPY – two USD pairs we will be watching closely on Election Night in the US tonight. Widespread risk off due to an uncertain outcome and the risk of a contested election scenario could drive JPY volatility and strength across the board and have the market focusing on 104.00 in USDJPY if US treasuries are back strongly on the bid at the same time. A strong Blue Wave outcome may see USD weakness, unless the market is over-positioned for this outcome and expectation. In any case, the EURUSD line in the sand is nearby in the low 1.1600’s
AUDUSD – the Reserve Bank of Australia meeting provided exactly what the market was looking for as the rate cut and announcement of QE programme seem to have largely been in the price. The $100 billion QE programme will buy both federal and state debt at a ratio of 80:20. AUDUSD gyrate slightly in the range and dipped a bit further later in the session after Governor Lowe indicated the RBA would need to consider negative rates if global peers do, but continues to indicate a distaste for the policy. Now, the direction of AUDUSD will be very much wrapped up in the US Election outcomes and how these affect risk sentiment, as AUDUSD looks vulnerable to an extension lower if the pivotal 0.7000 level gives way.
Brent crude oil (OILUKJAN20) and WTI crude oil (OILUSDEC20) - witnessed a near 10% rally from bottom to top yesterday after an overwhelmingly bearish short-term price outlook, triggered a reaction from the OPEC+ group of producers. Faced with surging production from Libya and slowing demand as the pandemic bites, Russia’s energy minister met with Russian producers to discuss delaying the planned 2 million barrels/day increase in supply from January. The news helped squeeze recently established short position, but a delay at this stage is unlikely to boost the price much further given the mentioned headwinds.
Gold (XAUUSD) and silver (XAGUSD) have both recovered with turmoil risk fueling flows ahead of today’s U.S. election. A move however that has not been reflected in ETF flows with total holdings in gold being reduced for the past four days. But overall, the market is gearing up to act as a hedge against post-election turmoil and the risk of a contested outcome. Following a series of lower highs, gold in order to improve sentiment needs to break above $1915/oz while a band of support is located between $1850/oz and $1860/oz.
Sentiment in Treasuries will depend on the US election, Treasury’s bond issuance plan and job’s data (30YUSTBONDDEC20). Even though the US election will be responsible for most of the volatility in the market this week, within the fixed income space the Treasury plan to issue bonds in the next quarter is extremely important. If the Treasury steps up issuance, and the Fed doesn’t expand its bond purchasing program, the long part of the yield curve can steepen fast. Large short positions in Treasury futures will also weight on Treasury sentiment, and if the market runs to safety, we might see investors unwinding these positions fast contributing to a rally in Treasuries the short term.
What is going on?
The Russian ruble has fallen below 80 to the US dollar – despite a huge resurgence in the oil price from yesterday’s lows. The weakness may stem from general uncertainty ahead of a likely Democratic win in the US election and the threat of eventual further sanctions as Biden and the Democrats are seen as far more likely to move against Russia on accusations of election interference. As well, Russia faces an uncomfortable situation in the conflict between Armenia and Azerbaijan, having committed at the weekend to defend Armenian territory (but the ethnic Armenian enclave of Nagorno-Karabakh is on nominally Azerbaijani territory.) Meanwhile, Turkey supports Azerbaijan in this militarily hot conflict. Finally, some Kremlin officials have signaled a desire for further Russian Central Bank rate cuts as long as inflation is below 4%.
Commodities found a fresh bid on Monday following last week’s strong dollar-led correction with all sectors recording gains as equity markets recovered in the final hours ahead of election day in the U.S. The oil market rallied strongly on news that OPEC and Russia are discussing a necessary delay of its planned production hike from January. Copper and nickel rose on stronger-than-expected Chinese PMI and on news that China plans to boost new energy vehicle sales over the coming years. In agriculture, wheat bounced back above $6/bu on lingering doubts about Russia’s winter and the pandemic’s impact on the need to secure food supplies while sugar rallied to an eight month high through the ethanol link to oil and unfounded rumors that India may reduce its export subsidies. Natural gas slumped after forecasts saw warmer-than-normal U.S. weather during the coming week.
What we are watching next?
US Election Night – does a clear result emerge. Yesterday, we put out a Saxo Market Call Podcast roundup looking at all of our Election Countdown conclusions and questions and uncertainties on Election Night. The accompanying article also presents a few different Electoral College scenarios that may emerge on election night. If a Biden landslide is in the offing, the market may have a strong tilt on the likely outcome by as early as 02:00 GMT / 03:00 CET if Florida reports its results quickly enough and based on any clear voting patterns in early-reporting counties in Indiana and elsewhere. If Florida and North Carolina are clearly very close well into the night, we could be in for a contested election scenario.
Q3 earnings season continues this with more focus on Europe. Q3 earnings continue to better than expected with Q3 EPS up 39% q/q for S&P 500 suggesting a quicker rebounding of profitability than previously expected. Companies have yet again been exceptionally fast in reducing costs as we have seen it so many times since 2008. Yesterday, PayPal reported Q3 revenue in line with estimates and EPS almost doubling from a year ago. However, PayPal shares were down in extended trading on weaker than estimated revenue outlook for Q4. Mondelez surprised to the upside on revenue as so many other consumer goods companies have done it in the Q3 earnings season.
Economic Calendar Highlights for today (times GMT)
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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