Market Volatility Ahead of the US Presidential Election

The upcoming US presidential election is poised to trigger notable market volatility this week, as investors prepare for potential risk hedging and position adjustments based on the election outcome. Once the results are finalized, however, attention is likely to shift back to critical economic events, including rate decisions from the Federal Reserve (Fed), Bank of England (BoE), and Reserve Bank of Australia (RBA). Additionally, economic indicators from China, such as new yuan loans and inflation figures, will also be closely monitored.

Europe

This week, Europe is set to experience limited data releases, meaning that global events will primarily shape market dynamics. On Monday, S&P Global is scheduled to release the final manufacturing PMI figures for October from key Eurozone countries, including Spain, Italy, France, and Germany.

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Preliminary data suggests that many countries are experiencing ongoing contractions in their manufacturing sectors, with Germany showing particularly weak activity. In contrast, Spain has emerged as a bright spot, reporting expansion in manufacturing activity since March. Following this, services PMIs will be released on Wednesday, with expectations of growth across most countries, although France may see a contraction in services activity for the second consecutive month, potentially due to an economic slowdown linked to the Olympics.

The prevailing weak economic landscape may continue to exert downward pressure on the euro against the US dollar, despite a rebound observed last week. The dynamics surrounding the election could bolster the dollar further, particularly given the persistent economic challenges faced by the Eurozone. Should signs of stability in the US economy emerge, the dollar may strengthen even more.

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In the UK, the BoE is widely expected to lower its interest rate by 0.25%, bringing it down to 4.75%. This would mark the second rate cut of the year, following a decrease in year-on-year headline inflation from 2.2% to 1.7% in September. Nevertheless, the BoE may adopt a more hawkish tone in light of last week’s budget announcement, which is anticipated to drive inflation higher due to significant tax increases. The implications of the US election could also lead the BoE to mitigate political risks by implementing a rate cut this week.

United States

The US presidential election results remain uncertain, with opinion polls indicating an exceptionally close race between Trump and Harris. Last week saw signs of the ‘Trump Trade’ unwinding, as gold, the dollar, and cryptocurrencies pulled back from recent highs. Should Trump secure re-election, this trend may reverse. Conversely, a victory for Harris could prolong the unwinding trend, causing the dollar to depreciate. Some analysts suggest that prevailing market trends could revert once election results are announced, as increased certainty may prompt investors to rebalance their hedged positions. Regardless, significant volatility is expected, as evidenced by the CBOE Volatility Index reaching a four-month peak.

Moreover, the Fed is set to announce its rate decision following the election, which will contribute to market fluctuations. It is anticipated that the Fed will reduce rates by 0.25%, even after last Friday’s disappointing job report. Unless unexpected election outcomes or subsequent developments raise concerns about US economic growth, the Fed is unlikely to adjust its current stance. A relatively hawkish Fed would likely support a strong dollar and bolster US stock markets.

Asia-Pacific

In the Asia-Pacific region, the RBA is expected to maintain interest rates at 4.35% after recently released inflation data. Australia’s headline inflation has cooled to 2.8% for the third quarter and 2.1% for September, remaining within the target range of 2-3%. However, the RBA is likely to prioritize quarterly data over monthly figures, leading to a decision to keep rates steady. Markets are speculating that the RBA could commence easing early next year, dampening expectations for a December rate cut.

In China, reports regarding new yuan loans, CPI, and PPI for September are imminent. Forecasts suggest a decline in bank lending to 770 billion yuan (€99.6bn), down from August’s 1.6 trillion yuan. Inflation is expected to show a mild year-on-year increase of 0.3%, while PPI is projected to decrease by 2.5%, indicating a two-year contraction despite ongoing government stimulus measures.