November 04, 2024

“The market is anticipating the most volatile week of the year ahead of a coin-toss US election and central bank decisions in the UK, US, Sweden, Norway, and Australia. The dollar has dropped over half a percent already this morning, after some polls showed an improvement in Harris’ position.”

Tim Hallinan – Trading Director

USD

The latest batch of polls have weakened the dollar at the open this morning, with markets modestly paring back the Trump trade as the momentum shifts in Harris’ favour. One particular Iowa poll has captured a lot of attention over the weekend, where a three-point lead for the Democratic candidate is seen as giving strong clues about swing state dynamics more broadly. Last Friday’s non-farm payrolls figure came in markedly softer than expected at 12k – the lowest since Biden came into power – but the unknown effects of the hurricane season meant that the market rightly chose not to pretend that there was any clear signal about the labour market in the headline number. The rest of the report was mixed; the unemployment rate held steady, but 112k jobs were revised away from the previous two reports.

Tomorrow’s election and Thursday’s Fed decision make for the ultimate double header this week. Positioning adjustments ahead of some late nights for traders this week are likely to dominate in in the lead-up to the vote. Expect volatility to begin to spike in low-liquidity conditions today and then to peak once the counts start coming in on Wednesday. In what would normally be the highlight of the week on Thursday, the market has priced a 25bp cut in at 83% for the Federal Reserve.

GBP

10-year gilt yields hit a one-year high towards the end of last week, once bond traders had decided that Reeves’ tax, borrow, and spend budget would be near-term inflationary and began betting on a slower pace of Bank of England rate cuts. Sterling has begun to reconnect with the ‘bad’ widening in its yield advantage that had initially sent it lower, and we are now around 0.9% higher than the lows seen on Thursday. If the pound’s risk premium can erode further and it can begin to trade in line with the more hawkish BoE outlook, GBP/USD may be able to grind higher today. Throughout the week, however, it will predominantly be steered by the US election and the Fed. Meanwhile GBP/EUR might be more sensitive to Thursday’s BoE rate decision, where a cut is priced at 93% but it is expected to be the final one of the year. The key here will be whether the budget has materially altered the scope for policymakers to keep cutting.

EUR

A weaker dollar means a stronger euro this morning. Trump would be bad for the euro, so it is likely to move inversely to his chances of success this week. His presidency could hit the common currency from several angles: by hitting eurozone exports with tariffs, in raising terminal Fed rates with tax cuts and lower immigration, and potentially through a more rapid ECB easing cycle, if policymakers anticipate an even softer cyclical outlook for next year. Today, we get a Sentix investor confidence number and a final manufacturing PMI.

Markets

Equities rallied on Friday, helped along by a positive earnings beat from Amazon. 6 of the Magnificent 7 have now released results and, despite some wobbles at month-end, the earnings season has sustained the risk on mood. In the bond market, the MOVE index of US Treasury volatility is the highest in over a year ahead of the US election.

Main Economic Events (All Times CET)

10:00am: Eurozone Final Manufacturing PMI
10:30am: Eurozone Sentix Investor Confidence

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