Market mood positive amid calm before US election storm

3rd November 2020 – Macro Daily

Markets This Morning

USD has broadly been on the back foot in recent trade, with DXY losing the 94.00 handle since Europeans arrived at their desks. There is a risk that choppiness continues ahead of tonight’s US Presidential election result. FX markets could thus be described as somewhat risk on, with NOK and AUD leading the gains (up over 0.5% vs USD on the day), with the latter have pared post-dovish RBA rate decision losses in recent trade, despite reports from SCMP that China is expected to ban imports of wheat from Australia in a further escalation of trade tensions between the two (although wheat imports are only worth AUD 560mln). GBP, NZD and EUR are the next best performers, each up around 0.4% on the day vs USD, Gains in SEK, JPY, CHF and CAD vs USD are more modest at around 0.1%-0.2%.

Elsewhere, market tone is positive and global equities continue to pare recent losses; the Stoxx 600 trades higher by around 0.7% this morning and S&P 500 futures are up a little over 0.5%. Some markets commentators have pointed to the final batch of pre-US election polls as contributing to, at the very least, an easing of some nerves that we might be in for a surprise at today’s election; CNBC had Biden ahead in six key swing states. Moreover, Biden continues to lead by 6.7% on average in national polls according to RCP. Conditions are thin so it is likely unwise to read to much into the moves higher we have seen in equities thus far on the week, but some might argue that markets are increasingly betting on a clear Biden victory on election night, meaning delay/a tighter than expected race may now carry slightly more downside risk. Oil continues to advance after reports yesterday that OPEC+ was said to be mulling continuing output cuts. Bond yields are a little higher in the US and Europe.

RBA Rate Decision

Markets expected a significant package of easing measures from the RBA this morning, and they went above and beyond; the RBA cut its three key lending rates (cash rate, 3-year bond yield target and term funding facility) to 0.1% form 0.25% and cut its rate on surplus exchange settlement balances to 0.0% from 0.1% (a little more than expectations for a cut to 0.01%). Moreover, the RBA committed to buying AUD 100bln in government bonds of maturities of 5 to 10-years over the next six months with an expected 80/20 split between bonds issued by the Australian government and by the states and territories, in addition to continuing to make the necessary purchases to keep the 3-year bond yield at 0.1%. This is much more aggressive than Westpac’s call for an “open ended asset purchase programme”. Elsewhere, the RBA reiterated that rates it does not expect to raise rates for at least three years and that more can be done if necessary.

Given the more aggressive than expected easing package from the RBA, AUDUSD fell in the immediate aftermath of the rate decision, the cross slipping as low as 0.7030 from pre-announcement levels around 0.7050. However, AUDUSD has since reversed higher aided by comments from RBA Governor Lowe who said negative rates were highly unlikely, alongside broad USD weakness that has seen DXY lose the 94.00 handle.

The Day Ahead

0900GMT/0400EDT, Riksbank Governor Ingves gives a speech and participates in a panel discussion on the Riksbank’s measures as a result of the coronavirus crisis.

1020GMT/0520EDT, Riksbank Deputy Governor Breman talks about how the financial sector can contribute to a positive development for the global sustainability objectives.

1100GMT/0600EDT – 0200GMT/2100EDT, Rough times that polls are open for US Presidential Election…

Biden is the favourite – Joe Biden is still the strong favourite to win the US Presidential election; RCP has Biden’s lead over Trump in the national polls at 6.7%, the lowest it has been at any point since early October, but roughly in line with where it was for most of August and September. State polling suggests the rate is tighter, but Biden still holds the advantage, with the latest poll from CNBC showing Biden ahead in 6 key swing states; in Arizona, he leads by 50% to 47%, in Florida by 51% to 48%, in Michigan by 51% to 44%, in North Carolina by 49% to 47%, in Pennsylvania by 50% to 46% and in Wisconsin by 53% to 45%. FiveThirtyEight gives Biden an 89% chance of winning, while betting markets are a little more cautious, putting Biden’s chances just over 60%. Democrats are also expected to win a majority in the Senate, though this battle is expected to be much closer, and to retain the house.

Not your normal Presidential election – Given the surge in mail in/early voting this year due to the pandemic (99mln Americans have already voted, 72% of the entire turnout in 2016), there is a possibility that we will not know who the next President is going to be on election night. Mail-in/early votes are likely to favour the Democrats, so Trump will need a strong turnout on the day. Eyes will as ever be on key swing states with the largest number of electoral votes; Texas, Florida, Pennsylvania, Ohio, Georgia, North Carolina and Arizona are all considered a toss up by the FT’s election calculator. Michigan, Minnesota and Wisconsin, all traditionally seen as swing states, lean Biden. Polls in Florida and Georgia close at 0000GMT/1900EDT and the pre-counted mail-in/early vote result will be quickly released, followed by the in-person vote on the night. If Trump cannot take both of these states, but particularly Florida, his re-election hopes will quickly start to vanish. 30 minutes later polls close in Ohio and North Carolina, followed by Texas, Pennsylvania and Michigan at 0100GMT/2000EDT. The result in the first three are likely to be known on election night; if Trump cannot win any of these, his re-election hopes will be considered very slim. But Pennsylvania and Michigan are unlikely to report results on election night, given their delayed timeline for counting early votes. There is a chance that, based on the results we get on election night, things might be very tight on election night, meaning that the eventual outcome of these two states could decide the election. US President Trump has continually brought up the risk that mail-in ballots, which are likely to strongly favour the Democrats, might be tainted with fraud, thus there is a chance he might contest any Biden win. Conversely, Democrat party sources have suggested that Biden will not concede the election to Trump prior to all votes being counted. Things could get messy.

Market Reaction – Clear evidence of a Biden win and Democrat Senate majority on Tuesday night (or the early hours of Wednesday, UK time) ought to be risk appetite positive (particularly AUD, NOK and CNH) and USD negative. Uncertainty as to the outcome of the election is likely to keep the likes of JPY and USD supported. Evidence that Trump is winning would see USD outperform.

1300GMT/0800EDT, German economy minister Peter Altmaier speaks at conference on legislation.

1400GMT/0900EDT, Eurozone Finance Ministers meet to discuss Banking Union operational aspects, hearing of the Chair of the Supervisory Board, recent activities of the Single Resolution Board, EUR as a digital currency, capital markets union and safety nets agreed by the EU.

1430GMT/0930EDT, GlobalDairy Trade Index (Oct)… Westpac “expect whole milk powder prices will be largely unchanged at this auction, thus consolidating earlier gains.” Prices have risen a cumulative 5% or so over the last two auctions, notes the Australian bank.

1500GMT/1000EDT, US Factory Orders (Sep)

2130GMT/1630EDT, API Private Crude Oil Inventories

2145GMT/1645EDT, NZ Labour Market Report (Q3)… TD Securities think the “Q3 Employment report is likely to show muted employment gains and limited signs of a pick-up in wages.” Moreover, continues the bank, “expect to see hours worked pick up as businesses use existing hires to pick up the slack while a rise in the participation rate is likely to drive the increase in the unemployment from 4% to nearer to 6%. Participation rate 70%, job growth -0.5%.”

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