To state the obvious, a lot rides on the outcome of the U.S. elections, as the results will determine U.S. and, to an extent, global policy development. Given the outsize impact of the impending elections, it comes as no surprise that the bar for other non-election related factors to materially change the current narrative is high. As a result, the markets continue to count down to Election Day, with most assets staying in their established ranges as opposed to moving on to new trends.
One of these existing themes is the market consensus for a Biden victory and a Democratic sweep of Congress to lead to U.S. dollar weakness on the expectation for trade uncertainties to fade and massive fiscal stimulus to be passed. Of course the problem with consensus views is that they are vulnerable to changes to the status quo, which in this case could come via a sudden shift in polling. Keep in mind that in 2016 Trump’s support numbers surged during the second half of October on the way to an eventual victory.
So while it is possible that we see a similar surge in support for Trump, the fact remains that Biden still has a large lead, and time is running out for Trump to make up ground. In essence, it may take a game-changing development, such as a Biden debate disaster, to move market expectations enough to alter the current market dynamic.
Should current polling data hold and there is a blue wave, the bias will be for the U.S. dollar to weaken. However, it also has to be acknowledged that the expected policy mix under a Biden administration should have offsetting impacts on the dollar. A resumption of a broad and sustainable multi-quarter downtrend in the U.S. dollar is unlikely until there is enough confidence to price in a full return to economic normalcy. To this point, the lack of retracement in equity baskets focusing on COVID-19 winners and losers suggests a continuing concern that things will get worse from a second wave before they get better from a vaccine. | |
| HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: | |
- U.S. initial jobless claims dropped more than expected, as jobless claims came in at 787K versus market expectations for 870K jobless claims. Last week’s jobless claim number was also revised down to 842K from 898K. Continuing claim numbers also improved, as they came in at 8.4 million against expectations for a 9.6 million print. While both of these data series beat expectations, they both remain historically bad.
- Hopes for U.S. stimulus remains, with House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin speaking again today. The new target deadline is now this Friday. But as we have written in the past, even if the White House and House Democrats are able to close the gap on their differences, Senate Republicans are currently the ultimate roadblock, as they don’t want to spend anywhere near the amounts being discussed. So despite all the positive headlines, chances of additional stimulus before the election remain small.
- Director of National Intelligence John Ratcliffe, the top U.S. spy chief, stated that Russia and Iran are meddling in the U.S. elections. According to Ratcliffe, Russia and Iran have both obtained voter registration information. Iran has faked a series of emails appearing to come from the right-wing Proud Boys group that are designed to intimidate Democratic voters. The spy chief didn’t disclose what Russia was doing.
- The U.K. has officially returned to the Brexit negotiating table as widely expected. Both sides are now set to intensify talks in hopes of striking a deal by mid-November. Given the history of Brexit, most, if not all, of the progress will come at the last minute. This means that nothing will likely happen until November rolls around.
- News reports indicate that China is preparing to allow for greater outbound capital flows. Over the past couple of weeks, China has started to take several measures to slow down the yuan’s one way appreciation. If China does increase the qualified domestic institutional investor quota by $10 billion, it will be more of a symbolic gesture indicating increased focus on yuan strength than a material change in dynamics as foreign bond inflows have already topped $100 billion so far this year.
- On the COVID-19 front, Germany has seen new infection numbers jump to a new record, while France and Spain have become the first Western European nations to record over a million cases.
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