- One-month implied volatility indicators turned higher across asset classes as they are incorporating the upcoming US non-farm payrolls report, FOMC decision and US presidential election. These three known unknowns remain a burden for risk assets.
- Donald Trump is extending his gains in the two largest and most important betting markets and is even closing the gap between him and Harris on general polling. Markets have begun to position for a potential Trump repeat next year.
- Resilience of the US macro data suggests that a large Fed cut over the next couple of meetings is out of the picture. Gradual easing in 25 basis point increments remains the base case. Still, watch out for potential downside surprises on hiring data.
- European leading indicators are not giving too much hope on the prospects of a quick recovery. However, both the manufacturing PMI and Ifo index seem to suggest that the worst might be over for Germany.
- In general, it is unclear how long and large the risk-off flows in FX will be under Trump 2.0. For equities, it is a clearer picture. In the medium-term, elections don’t matter too much for equity gains. 13/15 last presidents oversaw positive returns.
- Next week will be a big one for markets as US data will continue to set the tone for investors. GDP figures, ISM PMI, and the jobs report will take center stage.
Global Markets
Pre-election hedging evident
US dictates markets. US economic exceptionalism, reduced Federal Reserve (Fed) easing expectations and improved polling for Donald Trump to win the US election have made for volatile trading this week. The US dollar secured its fourth consecutive weekly gain against the backdrop of rising bond yields and equities treading waters.
Safe-haven flows. Beyond the return of US economic exceptionalism though, geopolitics and domestic politics are giving the dollar another layer of support. Gold hit an all-time high as tensions in the Middle East and the increasingly tight US election race spurred flight to safe haven assets.
Election hedging. US bond volatility remains elevated, helping to lift the US dollar which has a positive correlation with it. The MOVE index has jumped higher as the US election enters the index’s horizon window. That happened on October 7th, which saw the biggest single-day percentage jump since 2020, beating the day when the Fed suggested it intended to hike rates 75-basis-point in June 2022, and bigger than the collapse of Silicon Valley Bank in March 2023.
Eurozone in danger? The euro is not the only currency suffering from investors positioning for the US election in advance. Still, the lack of a free trade agreement (FTA) between the United States and European Union suggest economic pain ahead under the scenario of a Trump win and increase in tariffs. EUR/USD implied one-month volatility is now the highest since early 2023 at 8.3% and the call option premium for the same tenor suggests investors prefer hedging against further downside vs. upside risks.
Global Macro
PMIs were clear: US continues to lead its peers
No turnaround in sight. Europe’s two largest economies continue to suffer from high interest rates, an external demand slump, and structural difficulties. The German PMI for the manufacturing sector ticked higher from a one-year high but remained well into contraction territory. The uncertain business outlook remains a drag on investment. The French barometer has now been negative for 21 months in a row with no recovery in sight. Firms future outlook remains the bleakest since May 2020.
Fading UK optimism. The flash PMI numbers out of the UK were weaker-than-forecast across the board. Private sector growth overall slowed to an 11-month low with the composite PMI at 51.7 in October, down from 52.6 in September. Services saw slightly faster growth than manufacturing, but both sectors lost momentum. Alongside the fall in business confidence revealed in the PMI, this morning, the GfK Consumer Confidence indicator for the UK, a measure of how people view their personal finances and broader economic prospects, fell to its lowest level year-to-date.
Continued US exceptionalism. Jobless claims came in lower than expected but continuing claims rose more than expected to the highest since 2021. Tepid regional Fed activity surveys contrasted with another solid set of PMI figures out of the US. The S&P PMI survey beat expectations on a headline basis across manufacturing, services, and the composite numbers, widening the ongoing divergence between the US and Europe.
The diverging macro picture has led some investors to rethink their positioning as it relates to the future policy bath of the respective central banks. Markets are split on the possibility of a large 50 basis point cut from the ECB at the December meeting. In the UK, overnight indexed swaps are still hesitant to price in two full rate cuts from the BoE for the remainder of 2024 though. Across the Atlantic, the chances of a 50-basis point cut from the Fed are slim. Markets are pricing in two 25 basis point cuts for November and December.
Appendix: US Election
Further considerations
Global or regional FX risk-off. Three channels under which the next US administration would impact markets. Domestic policy, trade policy, and foreign policy. Under Trump 1.0, getting extended tax cuts took one year so either candidate will need the whole of 2025 to get something substantial done. Protectionism would be the most obvious channel through which the dollar strengthens. Then the questions remains, would this spark a global risk off wave impacting all pro cyclical currencies or would it result in more regionalism, countries that have free trade agreements with the US.
Equities. In the long haul, it doesn’t matter. In almost all presidential elections since 1980, markets moved higher after election day. The two notable exceptions were in 2000, when the tech bubble bursting continued to weigh on markets and the economy headed into recession in 2001, and in 2008, when the onset of the Financial Crisis weighed heavily on markets into 2009. It is important to note that 13 out of the last 15 presidents experienced rising equity markets during their reign. Two anomalies: Bush and Nixon. As a matter of fact: Only three presidents oversaw negative equity returns during their time in office going back to Roosevelt in 1901.
Where is common ground? There are two areas where Harris and Trump would tend to go in the same direction. Both are fueling a trend that has started appearing over recent years, which is the tendency for trade to become regionalized. Because of the increase complexity of supply chains and the globalization wave having peaked before the global financial crisis, companies have started looking at ways to minimize freight costs and shipping times. And the second one is the debt debate. Budget deficit and the debt-to-GDP ratio will increase under both candidates. There are no plans for fiscal consolidation given the lack of political acceptability and deficits will continue to build. Fiscal policy is currently on an unsustainable path, that neither candidate is addressing.
Week ahead
US data to move global markets
Big week ahead. One-month implied volatility indicators have turned higher across asset classes as they are incorporating the upcoming US non-farm payrolls report, FOMC decision and US presidential election. These three known unknowns are leading to some volatile trading and have benefited safe-haven currencies so far. Going into next week, US and Eurozone GDP and inflation figures will enjoy the most attention. In Asia, Chinese PMIs and the BoJ rate decision will take center stage.
Strong growth. US GDP growth for Q3 should come in slightly above 3%, highlighting an uptick in consumer spending. However, the numbers will likely also reflect pulled forward investment from companies anticipating the US election and supply chain issues going into holiday season. Economic momentum should slow into Q4 as US CEOs become more risk averse as the end of the year approaches.
Weak hiring? US job growth is set to downshift from the recent uptick seen in September. The October print is expected to come in slightly above 100k, less than 50% of the previous 254k figure. It is important to note that Bloomberg economics forecasts a negative -10k print due to the slowdown in hiring related to the hurricane season. The S&P purchasing manager indices beat expectations across the board. It is now up to the more important ISM to show the same. Consensus expects a slight improvement in October as regional Fed PMIs have painted a somewhat positive picture as of late.
Inflation below target. In the Eurozone, inflation is expected to have stayed below target with core inflation falling from 2.7% to 2.6%. This is unlikely to change the ECBs outlook on monetary policy.
FX Views
Political impetus on top of macro divergences
USD Recovery phase two: politics. A multitude of bullish factors are driving the US dollar higher. The resurrection of the US exceptionalism narrative. The rise in fixed income volatility with US yields surging to 3-month highs. Plus, geopolitics and domestic politics are giving the dollar another layer of support, especially given the improved polling for Donald Trump. We could see additional safe haven flows into the buck too, especially if more de-risking ahead of the election leads to a significant reduction in liquidity. Meanwhile, hedge funds and asset managers reduced their bets against the US dollar (short positions) in the second week of October by around $8 billion. This is the biggest shift in sentiment since 2021. The US dollar index has, meanwhile, risen for four consecutive weeks by almost 4% to near 3-month highs. The first phase of the dollar recovery was all about the US economy, whereas the second phase could be all about politics.
EUR On high alert ahead of election. The euro has had to fight a plethora of headwinds over the past four weeks. From disappointing macro data for Germany, inflation falling below target in most Eurozone countries, and increasing bets of further monetary policy easing to political uncertainty surrounding the US election. This has finally pushed EUR/USD below the mark of $1.08, down 3% for the month. Meanwhile, the two-week implied-realized volatility spread, a key options-market measure based on how much wider currency swings are expected to be in the future compared with now, has jumped to a 7-year high. Alongside that shift, two-week implied volatility had its eighth-largest daily advance on Wednesday since the European sovereign debt crisis. One-month volatility is now the highest since early 2023 at 8.3% and the call option premium for the same tenor suggests investors prefer hedging against further EUR downside vs. upside risks.
GBP Stung by bond market volatility. As the Bank of England is no longer seen as the hawkish outlier, coupled with the fact overall G3 easing expectations have fallen, the British pound is on the backfoot against the US dollar. GBP/USD fell to the weakest level since mid-August, down 3% MTD and wrestling with its 100-day moving average support level at $1.2965. A convincing break below opens the door to its 200-week moving average at $1.2850 which should offer decent support in the short-term. Over the long-term, especially if the Democrats win the US election, we still favour the pound extending back towards $1.35 next year assuming US economic growth starts to cool and the Fed cuts interest rates more than the BoE. However, a tail risk scenario of a Republican clean sweep is seen sending GBP/USD under $1.25 before year-end. Against the euro, sterling remains near the €1.20 handle, buoyed by the uplift in short-term rate differentials, with the 2-year spread at 12-month highs. GBP/EUR is now around 12% higher than its 2022 low, 4% higher year-to-date, and five cents above its 5-year average.
CHF Haven appeal limits losses. The Swiss franc is holding its own amongst the G10 currencies thanks to its safe haven appeal amidst in the wake of rising bond market volatility and ahead of the US election risk event. That said, the 2-week implied-realized volatility spread which now captures the US election is at its highest since the depths of the pandemic in 2020 in a sign of expected wide swings in the pair and indicating hedging costs are overpriced. USD/CHF hovers near two-month months, pressured by a stronger dollar on expectations of a more gradual monetary easing cycle by the Fed. Meanwhile, the continued deceleration in Swiss inflation (at three-year lows) reinforced expectations of another rate cut by the Swiss National Bank (SNB) at the upcoming December meeting. The diverging rates story could become more of a burden for the franc if risk appetite picks up and volatility subsides following the US election.
CNY Yellen questions China’s stimulus impact. US Treasury Secretary Janet Yellen on Tuesday said China’s latest stimulus measures may not be able to boost domestic demand enough to absorb excess production, leaving a key source of trade friction. Over the coming week, she added, Treasury officials would meet with representatives from China’s finance and trade ministries in Washington. Separately, Pierre-Olivier Gourinchas, the chief economist for the IMF, said that the PBoC’s actions last month would not significantly increase GDP and that China’s fiscal stimulus plans were vague, according to Reuters. He said that rising Chinese trade surpluses were being driven by both excessive US consumption and poor domestic demand. The USD/CNH surge stops close to the 7.14–7.146 Fibonacci retracement confluence, although its crucial chart inflection at 7.06 is bullishly whipsawed. The medium-term setup of the chart is unclear, with crucial tactical support now located between 7.046 and 7.097. The Caixin PMIs, manufacturing, non-manufacturing, and China composite PMIs will all be monitored by the market.
JPY Intervention fears rise as USD/JPY tops 152. Speaking at the IMF meetings, BoJ Governor Kazuo Ueda emphasised that the central bank is keeping a “fairly easy” monetary posture and that it is extremely difficult to predict the magnitude and timing of future rate rises. Expectations for inflation are steadily shifting, and the BoJ wants to raise them. Ueda reaffirmed the importance of the BoJ’s unambiguous communication of its policy position. Since the USDJPY is still far over 152, the market is still quite interested in FX intervention risk. Chart shows positive correlation of Topix and USDJPY, which suggest weaker Yen boost corporate profits. Separately, the USDJPY returned to the 150 level for the first time in almost two and a half months on October 17, after the announcement of the robust US retail sales data. Retail sales, industrial output, the unemployment rate, and the BoJ rate decision will all be monitored by traders.
CAD BoC move sends CAD to lows. The Canadian dollar fell to within 1.0% of four-year lows versus the US dollar over the last week after the Bank of Canada cut interest rates by 50 basis points on Wednesday. The move was the BoC’s fourth rate cut this year and the central bank has now lowered the official rate to 3.75% from 5.00% at the start of this year. The USD/CAD climbed back above 1.3850 and near the 1.4000 level that has capped prices since early 2020. The CAD was weaker in other markets with the biggest losses versus the Australian dollar and British pound. Aside from the BoC, the news focused on local producer prices, with key measures plummeting and illustrating why the central bank feels comfortable cutting. Technically, the USD/CAD is overbought on momentum indicators like the relative strength index, so the move higher might flag as we near 1.3900 – 1.4000. This week’s downside targets are to 1.3735 and then 1.3675. BoC governor Macklem speaks on Monday with GDP due Thursday.
AUD Services recovery masks manufacturing woes. Although services sector activity increased somewhat to 50.6 from 50.5, Australia’s October Judo Bank manufacturing PMI shrank further, hitting a 53-month low at 46.6 from 46.7 previous month. Keep in mind that expansion and contraction are separated by the neutral level of 50. Due to disparate demand conditions in the manufacturing and services sectors, the composite PMI fell more slowly, from 49.6 to 49.8. Although exports declined more quickly in all sectors, overall new orders increased for the third consecutive month due to new services company development, pushing the employment index to its highest level since May. Following a bearish whipsaw back into the 2023–2024 zone, the AUD/USD seeks to regain some footing at the 0.6628 and other close levels. The retracement levels of 0.6767 and 0.6834 are short-term resistance. This week, traders will be monitoring retail sales, the PPI, and the CPI.
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
