The final leg
After months, almost years of speculation, the most dramatic Presidential election of our times is finally drawing to a conclusion this week. The final election ballots will be cast tomorrow and a few days later the final counts – including mail-in ballots, which are a such a prominent feature due to Covid-19 – must be completed. Even the political and economic outcomes are far from conclusive, a feature of our new post-truth reality. The US election isn’t the only issue that is awaiting conclusion in the near future. In the UK, Brexit negotiations are potentially leading to a deal by mid-November, at the same time the UK and EU nations enter a second lockdown.
Look at pretty much any poll and you will see a wash of blue, where the challenger Joe Biden is leading. The problem with this simplistic view is that is does not account for the many intangibles in this particular election. For instance, according to CNN more than 90 million Americans have cast their vote by mail-in ballot, which represents two-thirds of the total 2016 vote count of 136.5 million. To further complicate things, the mail-in votes might favour one party, but not accurately represent the population voting. When you have a first-across-the-line system it is not clear how a state can fairly account for mail-in votes, which is why each territory is taking its own approach. What’s more, some states are not permitted to start counting mail-in votes until election day but have a legal injunction from the Supreme Court to allow for three further days of counting.
Not to mention that both parties are positioning for a legal contest in states where the votes go against them. Donald Trump’s team are already set to contest outcomes in key battleground states, like Pennsylvania, where a drive by Democrats has a good chance of turning the state blue on election day. It is entirely plausible that President Trump simply calls the election for himself when the vote count seems to be moving in his favour but before anything nearly conclusive is determined, because of the confusion of multiple counting systems. Almost certainly each side will challenge processes on a state-by-state basis where the outcome does not favour them. This brings back memories of the infamous Florida recount that handed George W Bush victory in 2000, except multiplied by 8 if you only include counting in key battle-ground states. We could be in a for a few tumultuous days this week as we await the outcome of this long-awaited contest.
Brexit might also be concluded this week, as negotiations move towards the signing of a broad terms agreement. The fishing quotas may be determined at a later date. Of course, mid-November is only the latest deadline in the past few weeks of tense public relations battle, so nothing is a foregone conclusion. The fact that most EU economies and the UK have decided to enter another lockdown is prompting a more conciliary tone towards the negotiations, which argues for an eventual deal but also raises the stakes of failure to reach a decision. The UK business community is understandably lambasting the government’s ham-fisted approach to managing this public health crisis. The business community will undoubtedly make their sentiments known after this Wednesday’s government vote over the proposed lockdown measures.
Bottom line: Of all weeks, this is not the one for a ‘finger in the air’ approach to calculating risk. Not only are the outcomes of these events entirely uncertain, the market response to any given scenario is not terribly clear either. With so many nuances at play, a conservative and simple plan is our favoured tack. The benefit of that approach is easy decision making if a large bout of volatility is experienced, but also, adjustments can readily be made as events unfold. We’re extending our hours this week, please get in touch with our team on +44 (0)20 3465 8200, if you’d like support with managing your requirements or to get a sense check of your preparations.
The week ahead
Last week, Sterling traded relatively flat on a trade-weighted basis compared to its counterparts, unable to break above its 200-daily moving average. However, price action was dominated by Dollar strength, pushing GBP/USD from above 1.3050 down to the 1.29 figure. Meanwhile, GBP/EUR slowly climbed to highs of 1.1131 on Friday. The week ahead has begun with notable volatility, with the Sterling Index falling over 0.5% on Monday morning, as Boris Johnson’s announcement of a second lockdown in the UK outweighs positive headlines regarding fishing rights in UK/EU negotiations. The Bank of England is expected to increase bond buying on Thursday, for the fourth time this year. Aswell as releasing updated economic forecasts which are now likely to look gloomier than analysts expected last week.
- Monday’s final reading of Markit’s Manufacturing PMI came in at 53.7, beating estimates of 53.3.
- On Wednesday, the final estimate of Markit’s Services and Composite PMI for October is expected to be 52.3 and 52.9 respectively.
- Thursday’s Markit Construction PMI figure for October is forecast a 55.0 reading, down from 56.8 in September.
The trade-weighted Euro Index fell over 1% last week as surging Covid-19 cases forced Eurozone economies into stricter lockdown measures, with many closing restaurants, bars, leisure facilities and retail stores. The European Central Bank took stage last week where President Lagarde strongly suggested new monetary stimulus would be announced at their December meeting. President Lagarde also stated the ECB expects fourth quarter economic growth is almost certain to be below forecasts. With the US election and the Bank of England and Federal Reserve policy announcements this week, there are plenty of potential catalysts for further volatility in one of the busiest weeks of the year.
- On Monday morning, the Eurozone’s largest economies beat expectations of expansion in their manufacturing sectors in October, according to Markit’s PMI, with the Eurozone aggregate reading coming in at 54.8.
- Wednesday’s Services PMI readings for October are expected to show contractions across the Eurozone’s largest economies, with the Eurozone aggregate figure forecast at 46.2, deteriorating from September’s 48.0.
- Thursday’s German Factory Orders for September are expected to show 2% growth, down from 4.5% in August.
- Also on Thursday, Eurozone Retail Sales for September are expected to show a contraction of 1.5%, down from 4.4% growth in August.
- Friday’s German Industrial Production for September is expected to read 2.6% growth, up from -0.2% in August.
The trade-weighted US Dollar Index surged nearly 1.5% last week as appetite for risk assets fell ahead of this week’s US election. The Dollar rally continued this morning before the Index topped out at the 100 daily moving average. Tuesday’s US election is the main event of the week. However, the Federal Reserve policy announcement and Friday’s US Labour market data release, are also key catalysts for market volatility. The Federal Reserve have already strongly suggested they will keep interest rates lower for longer, but analysts will be seeking more guidance on the Fed’s future balance-sheet policy.
- Monday’s ISM Manufacturing PMI for October is expected to show expansion at 55.8, up from 55.4 in September.
- On Tuesday, September’s Factory Orders are expected to show 1.0% expansion up from 0.7% in August, while Durable Goods Orders are expected to show 0.8% expansion in September.
- Wednesday’s ADP Employment Change is expected to read 650k in October, down from 749k in August and the ISM Services PMI figure for October is forecast expansion at 57.5.
- Thursday’s Initial Jobless Claims is forecast 735k, down from 751k the week before.
- Friday’s Non-Farm Payroll figure for October is expected to read 600k jobs created, down from 661k in September, while the Unemployment Rate is expected to tick lower to 7.7%.
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