The Week Ahead: US Election, Central Banks and Macroeconomics

The week ahead in the global financial markets is expected to be volatile. It might be the biggest week of the year due to high-impact economic, social, and geopolitical happenings. Let’s look at how these events could impact the markets.

November 01, 2020 / AtoZ Markets – Last week, markets were risk-off. The dollar gained across the board while global stocks plummeted. Risk concern is attributed to the second wave of Covid-19 and perhaps the uncertainties around the US election coming on Tuesday. Commodities also plummeted with Gold lost its safe-haven appeal once again. Oil products fell sharply as OPEC expressed worries concerning global demand as a result of the current Covid-forced lockdowns in Europe and a second outbreak in the US. Aussie, CAD, and Kiwi, being commodity and riskier currencies, fell. Swiss Franc and Yen, on the other hand, had the upper hand as safety currencies.  The week ahead is expected to be much more volatile.

Macro Economics

After the PMIs Monday, job data in the US, Canada, and New Zealand will be released later in the week. The dip in job data is expected to continue. In the US, market consensus expects 600k new jobs in October and better 7.6% unemployment rate than September’s. In New Zealand, the market expects the October employment change drop by 0.7% together with a worse unemployment rate at 5.5% compared to what we had in September.

Bank’s Monetary Policies

Covid drove the markets into massively crazy runs between January and March. The second quarter followed with a V-shape recovery which ran through the 3rd quarter as economies recovered sharply from the virus. The banks and governments ‘unlimited’ fiscal and monetary supports post-lockdowns largely played major roles in achieving this. However, the second wave since September has raised fresh concerns. Central banks have been restrictive to take actions in their last meetings as economic recoveries stunted. However, that’s expected to change in their next meetings from this week. Bank of England, Reserve Bank of Australia, and the US Federal Reserve Bank can come with fresh QE programs when their monetary policy committees meet later in the week. Investors will focus on the tone of their statements and the next steps toward curbing any further damages from the virus. There are already restrictions and lockdowns across Europe with the UK PM being the latest to declare a 4 weeks lockdown of some sectors of the state.

US Election

By a very wide margin, the biggest event this week is the Tuesday US election between incumbent President Trump and former Vice President Biden. Elections in the US are not easy to predict. Historically, the pre-election polls often fall behind the final outcome. In 2016, Hillary Clinton was far ahead of Trump in the polls and even led by 3 million majority votes in the real voting. However, in the US, the majority doesn’t always win. The key battleground states hold the ace. Meanwhile, the market will need a reference point which seems to support a Biden victory according to the polls. However, President Trump has been closing the gap in the last 48 hours. This could also suggest that the ‘fence-sitters’ population might be for the incumbent. Meanwhile. ahead of the election, here are the key points that drive the current sentiments.

Pre-election Market Sentiments

  1. Joe Biden and the Democrats have a more robust Covid19 stimulus package. Although President Trump has been pro-equities, however, investors are more concerned about the size of fiscal and monetary support going forward as Covid19 threatens fresh lockdowns. Aside from this, the perception that President Trump’s downplaying of the impact of the virus by some of his actions and inactions is driving fresh sentiments that his handling of the pandemic might cause more damages. Therefore, a Joe Biden win should favor sharp recoveries in the stock market and thus drive in a bearish USD.
  2. President Trump lags Biden in terms of foreign policy, at least from consensus sentiments. In his 4 years, President Trump has had tough moments with other world powers especially China and the EU. In fact, a war almost broke out in January with Iran. His win, therefore, should boost immediate rallies for the Dollar as a safe-have global reserve currency. Equities, on the other hand, should bounce back after an initial dip.

Possible Market Reactions to Election Outcomes

With the polls expecting a Biden victory, a Trump win could drag equities down and cause safe-haven flow for USD, CHF, and JPY. On the other hand, more risky FX like AUD, NZD, and CAD might plummet sharply. A Biden win could lead to a USD, JPY, and CHF slide while equities and risky FX should gain. However, there are other scenarios that include whether either of the Democrats and Republicans would control the legislative seats. Imagine a Dem control with a Trump win or a Rep control with a Biden win. That will be bearish for the stock market as the POTUS will find himself in the midst of adversaries. USD should bounce as a result of uncertainties that would arise.

However, if the Presidential winner’s party controls the legislature, then more spiky moves should emerge. A Biden win and Democrats control would cause big bullish equities and a very bearish USD. A Trump win and Republicans control might cause the opposite in the short term before equities would rebound.

We can’t be certain of what would happen. However, one thing is certain – big and spiky volatilities across markets.

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