Risk aversion dominated the market last week ahead of Tuesday’s election in the United States. Global stock indices plunged as the dollar got the necessary lift across the FX board. Covid19 situations worsen in the US and Europe. Restrictions meant closure of some business activities and thus, could lower the economic growth forecast for the last quarter of the year.
The week ended with the DXY gaining over 1% as a safe-haven instrument, together with currencies like JPY and CHF. However, riskier FX like AUD, NZD & CAD were the biggest losers of the week as they slumped massively. Aussie and Kiwi fell by over 1.5% each as NZD inflation data came below expectations. Earlier in the week also, China reported a lower than expected growth expansion in the last quarter. FX macroeconomics overall were close to expectation this week and thus added little effect. Global economic recovery was significant in the 3rd quarter of the year, although that might get stunted in the last quarter as a result of the virus.
Commodities fell across the board. Oil led the losers with an over 10% slump as OPEC+ admitted current Covid resurgence is bad for global oil demand. Gold and Silver fell as well. The yellow metal was down by 2% this week before the Friday New York opening. Surprisingly, Gold seemed to have lost its safe-haven advantage as investors look out for some other safety instruments. It remains to be seen whether the stock-gold positive correlation that we have seen since September will change after the election.
What should traders expect in the coming week?
Next week will be very volatile in the forex market. By far, the biggest event is the US elections on Tuesday. Before the elections, traders will also watch out for PMIs in the Eurozone, US, Canada, and Japan on Monday. Early on Tuesday, the Aussie rate statement and NZD employment report will accompany the election day. However, they are expected to be consumed by the election fire.
Post-election, we have the BOE and Fed on Thursday. That could add more sparkle just as the market tries to settle from the election consequence.
The US election – possible outcomes
The US election is not often an easily predictable one. Many polls and bookmakers are already suggesting an easy win for Biden. However, Trump might make a swift come-back just as we saw in the 2016 win over Clinton after faltering by 3 million majority votes. What matters most are the so-called battleground states. What are the possible outcomes? Here are a few facts to know and possible outcomes to watch out for.
- Currently, the President is a Republican and his party controls the Senate. However, the opposition Democrats control the House of Representatives. The two arms have their ‘veto’ powers which means that power is shared between the two parties.
- Biden promises a bigger stimulus package but looks forward to fund extra spending from higher corporate and capital taxes. Meanwhile, Trump offers less in direct stimulus package but lower taxes. This suggests a Biden win would be better for the stocks and worse for the Dollar.
- A Trump win means more fierce trade relations with China and the EU. The dollar could get a boost. On the other hand, Biden is seen as being milder and less arrogant and should maintain a more stable foreign policy. Another reason for a pro-stock Biden.
- A Biden win but a shared legislature between the two parties (most likely scenario if we go with the polls)- This could hike stock prices and exert pressure on the dollar. This is born from a better stimulus package which is what the economy needs at this moment with the virus fighting back.
- A Trump win and a shared legislature (more likely historically)- The status quo will be maintained. Stocks could start with a dip due to the disappointment of less stimulus. However, it should make its way back up after some days especially if the Thursday Fed monetary policy meeting is optimistic. The dollar, on the other hand, could start with a move upside and could go higher if investors perceive that Trump is coming back to continue the trade face-off with China.
- A Republican sweep (very unlikely) – Very good for the stock market but bad for the dollar. Could mark the continuation of the dollar weakness for weeks. Stock markets on the other hand should hit fresh highs.
- A Democratic sweep (very unlikely) – The possible outcome is Bullish stock markets and USD. Good for the dollar in the meantime as the demand for safe-havens could skyrocket. Very positive for the stock market because of a much easier policy delivery.
- Inconclusive Outcome – The loser challenging the winner in court. This will be more complicated if the incumbent does the challenging. It could be negative for stocks in the short term as the stimulus package could be delayed further in the face of the current growth retrogression. The USD on the other might show absolute neutrality in the short-term but not without sharp whipsaws.
In all, there are many factors at play during and after elections in the world’s largest economy. Not just the USD would get affected, other major currencies could also get hit especially those that have strong ties with the US. For example, AUD and NZD flows with the S&P 500. CHF and JPY share safe-haven flow with the USD. Gold, Silver, Oil, and other commodities are dollar-denominated. Euro has an inverse correlation with the dollar index. The effect therefore would be like a wild-fire across the global markets.
The US will go to the polls on Tuesday and the markets are expected to be volatile no matter the outcome. Many pre-election polls suggest that Biden will trump President Trump. But, it’s actually more than just Trump-Biden. It’s more of a Democrats-Republicans battle.
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