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The election calculus

Today's news headlines:

  • ‘Draghi signs off from ECB with one last cry for fiscal action’. In yesterday’s farewell ceremony, Mario Draghi made one last call for ‘Euro Area fiscal capacity of adequate size and design’ for monetary policy to achieve its objective with minimal side effects. German Chancellor Angela Merkel acknowledged Draghi’s plea, adding ‘the ECB can’t do the homework of governments that they themselves need to finish to strengthen their competitiveness’. (Bloomberg)
  • ‘Trump impeachment inquiry enters new phase as Pelosi sets vote’. Speaker of the House of Representatives, Nancy Pelosi, announced the House would vote on the next steps for Trump’s impeachment inquiry later this week. She also announced the general public will soon get to look at the evidence being built on the subject, pushing the inquiry into a new key phase. (Bloomberg)

Building expectations

Yesterday, Boris Johnson suffered his third defeat on the path to a general election but is determined to try a different tack—passing an amendment for the proposed date—which has a lower bar to success. The election calculus is more confusing than it has ever been. Labour wishes to postpone a vote until after Brexit when it can more effectively run under a traditional platform. Labour abandonment in Scotland is particularly pronounced where a large swath of the electorate has gravitated towards the SNP and the pro-EU cause. This is a vast simplification of the various demographic dynamics, but one thing is clear, a pre-Brexit election would likely result in worse labour outcomes than voter Corbyn-avoidance could ever deliver in isolation.

In advance of tomorrow night’s Federal Reserve meeting, we’re seeing a greater dichotomy in expectations of the central bank’s path going forward. The consensus market expectation is for a 25bps cut and little else of 2020. As we noted yesterday, this expectation for a change in direction has to do with Chairman Powell’s characterisation of the first rate cut in July, where he was emphatic this wasn’t a permanent downwards shift in rates. Our view is that he will have to change his communication because this will be the third sequential cut, but since July, the economic backdrop has gotten worse, so a halt to cuts is certainly not a foregone conclusion. Our sense, given comments from various Fed speakers over the past few months, is that policymakers will likely signal a short term reprieve and make further cuts conditional on more economic deterioration, so-called ‘data dependence’. 

Bottom line: Quite a few market participants are expecting a far more dovish shift in Fed policy which would serve to support greater asset price appreciation when the Fed cuts further. However, given the already rich valuations and the relative resilience of the US economy, it’s likely there will be some disappointment in equity and some bond markets on Thursday. We make no prediction here, but the greater dichotomy of expectations implies some forecasters will be just too extreme in their opinions when the Fed has exhibited nothing but moderate views in spite of administration lambast.


Cable traded flat overnight after Boris Johnson lost his motion on a general election and a new Brexit extension to 31st January 2020 was secured. A new bid for a general election due to take place today could yield a different result, causing intraday volatility. The pair has maintained most of its October gains, with the 1.28 level providing support in recent sessions.


Yesterday, a weaker Euro helped the currency cross break the 1.16 level again before falling back below the big figure. Short-term implied volatility has dropped off for the pair, suggesting the secured Brexit extension and a new general election bid is prolonging Brexit uncertainty. A continuation of Euro weakness could keep GBP/EUR lifted if Sterling trades flat.


The pair continues its downward trend in the  London open after reaching resistance at the 1.11 level yesterday. With a light day of data ahead, flat trading can be expected for the pair today, especially as the EUR/USD sits in the middle of the 90 pip range of the 50 and 100-daily moving averages.