US equity futures, global stocks and crude oil surged for a second day on Tuesday as a "gust of optimism" swept across global equity markets as millions of Americans headed to vote. The dollar tumbled amid rising bets on FX vol while yields rose.
Emini were up 39 points, or 1.2% to 3,340, up almost 120 points from Sunday night lows. PayPal dropped 4.8% after it forecast current-quarter profit below expectations. Shares of big U.S. banks including Bank of America Corp, Citigroup Inc, JPMorgan Chase & Co and Goldman Sachs Group Inc, which are sensitive to the economic outlook, gained between 1.4% and 2% in premarket trading, boosted by a steeper yield curve. The VIX retreated for a second day after touching a 20-week high last week on surging coronavirus cases globally.
"The election outcome will drive all markets over the next day or two," Torsten Slok, chief economist at Apollo Global Management told Bloomberg. “How they move depends on the extent to which we have clarity about the results.”
After slumping to five-week lows last week, the S&P 500, and to a lesser extent the Nasdaq, began November on a strong footing amid rising bets that a decisive blue sweep today could hopes of a bigger stimulus package after the election, even though the latest PredictIt odds for a Democratic Sweep (Biden + Dem Senate) remains just a fraction above a coin toss.
"Currently, the market is betting on a Biden win,” said Christian Stocker, UniCredit’s lead equity sector strategist. “Under a Biden presidency, the U.S. economy should be more supportive for equity markets - an economy with more stimulus programs will be perfect for the outperformance of cyclical sectors." Of course, analysts unanimously predicted a market crash if Trump wins in 2016 and everyone knows what happened next: the S&P has surged about 55% since Trump clinched a "shock" victory in 2016 as lower tax rates under his administration boosted corporate profits. Much of that will be undone by a Biden admin.
At the same time, traders hedged prospects of post-vote volatility, pushing a measure of expected swings in China’s yuan to its highest level in more than nine years.
Still, the competition in swing states is seen as close enough that Republican President Donald Trump could still piece together the 270 Electoral College votes he needs to stay in the White House for another four years. In fact, the latest RCP battleground states tracker show that the spread between the two candidates is the closest it has been.
Investors are also bracing for wild market swings in case there is no immediate outcome on Tuesday night due to a protracted ballot count or a disputed result.
Then, once the U.S. election passes, investors will contend with the Federal Reserve delivering a policy decision Thursday before the October jobs report Friday.
Looking at global markets, European shares extended their recovery rally on Tuesday helped by the sliding dollar with investors putting coronavirus worries on the back burner for now, as attention turned to the U.S. presidential election. The pan-European STOXX 600 index rose 1.7%, bouncing off five-month lows hit last week on worries over new partial lockdowns across the continent. Growth-sensitive cyclical sectors such as oil and gas , miners, banks and automakers led the rally - all rising more than 2%.
Among individual stocks, French bank BNP Paribas gained 5.5% as a surge in currency and commodity trading helped it beat quarterly profit expectations. Fashion house Hugo Boss jumped 6.7% after it reported a return to profitability in the third quarter and said it was focused on driving a recovery of its business online and in China. Shares in German meal-kit delivery company HelloFresh , which has more than doubled in value this year due to strong demand on the back of the pandemic, fell 3.5% after quarterly results. Bayer slipped 1.0% as it took impairment charges of 9.25 billion euros ($10.79 billion) and warned of higher costs from its settlement over claims that its Roundup weedkiller causes cancer.
A Biden win is widely considered supportive for European equities on expectations of a bigger stimulus package and better trade ties with the United States: "It’s reflation trade for European stocks,” said Christian Stocker, UniCredit’s lead equity sector strategist. “Currently, the market is betting on a Biden win. Under a Biden presidency, the U.S. economy should be more supportive for equity markets - an economy with more stimulus programmes will be perfect for the outperformance of cyclical sectors."
However, Stocker does not expect the gains to last long as coronavirus cases increase at an alarming rate in Europe, pushing major economies like Germany, France and the United Kingdom to reimpose tighter restrictions and causing economists to cut fourth-quarter economic growth expectations.
Earlier in the session, the MSCI Asia Pacific Ex-Japan Index added 1.4%. Japan's markets were closed for a holiday. Asian stocks gained led by the materials and energy sectors, after climbing in the last session. Trading volume for MSCI Asia Pacific Index ex-Japan members was 13% above the monthly average for this time of the day. The Shanghai Composite Index rose 1.4%, driven by Kweichow Moutai and China Life.
Boosting reflation trades, oil held gains after jumping the most in three weeks on Monday on increasing signs OPEC+ will delay a planned easing of output cuts. WTI futures rose as much as 3.2% to $38/bbl in New York, and was trading 2.1% higher. Brent also gained as much as 2.9% to reach $40.10.
In FX, the Bloomberg Dollar Spot Index was set for its biggest decline in more than three weeks. The euro rose toward $1.17 and overnight volatility in euro-dollar surged to the highest level since March. Currency options traders are betting that the U.S. election outcome won’t be a game-changer for the euro, at least in terms of immediate market reactions. Commodity currencies led Group-of-10 gains, with the Norwegian krone advancing the most, as oil prices rose on broader risk-on sentiment and as OPEC+ inched closer to delaying a planned easing of output cuts. The Australian dollar bounced, after earlier falling against all G-10 peers after the Reserve Bank cut interest rates and expanded its quantitative easing program. The nation’s benchmark bond yields extended a decline.
In rates, the treasuries curve resumed bear-steepening as investors sought riskier assets with long-end yields cheaper by nearly 3bps. Large block sale in Ultra 10-year note futures during London morning further weighed. Yields were cheaper by 0.5bp to 3.5bp across the curve, steepening 2s10s, 5s30s by 2.5bp and 1.9bp; 10-year yields around 0.87% after topping at 0.879%, cheapest since June. Treasuries outperformed bunds and gilts by ~0.5bp and 1bp respectively.
Looking at the day ahead, though all eyes will be on the US election, there’ll also be data on US factory orders and durable goods for September and the ECB’s Knot will be speaking. Eaton Corp. and Sysco are among companies reporting earnings.
- S&P 500 futures up 1.4% to 3,347.75
- STOXX Europe 600 up 1.4% to 352.70
- MXAP up 1% to 175.45
- MXAPJ up 1.4% to 584.09
- Nikkei up 1.4% to 23,295.48
- Topix up 1.8% to 1,607.95
- Hang Seng Index up 2% to 24,939.73
- Shanghai Composite up 1.4% to 3,271.07
- Sensex up 1.3% to 40,254.98
- Australia S&P/ASX 200 up 1.9% to 6,066.36
- Kospi up 1.9% to 2,343.31
- German 10Y yield rose 2.4 bps to -0.616%
- Euro up 0.5% to $1.1695
- Italian 10Y yield fell 1.2 bps to 0.636%
- Spanish 10Y yield rose 1.4 bps to 0.135%
- Brent futures up 3.6% to $40.39/bbl
- Gold spot up 0.2% to $1,898.56
- U.S. Dollar Index down 0.5% to 93.66
Top Overnight News from Bloomberg
- Twitter Inc. put a warning label on a post by Trump claiming that a Supreme Court decision allowing an extension for counting votes in Pennsylvania would lead to cheating and induce violence
- Large parts of Europe are preparing for tougher measures to fight the pandemic: U.S. Prime Minster Boris Johnson said there is “no alternative” to imposing a coronavirus lockdown across England to stop the health service being overwhelmed, as he revealed plans for whole cities to be tested to root-out asymptomatic carriers of the disease
- The Italian government is readying new relief funding of at least 1.5 billion euros ($1.8 billion) for businesses affected by a coming wave of new shutdowns to combat the spread of Covid-19, people familiar with the matter said
- Starting Nov. 5, the Reserve Bank of Australia will begin purchasing Australian Government securities and securities issued by the state and territory central borrowing authorities in the secondary market under the A$100 billion bond purchase program
- President Donald Trump’s and Democrat nominee Joe Biden’s campaigns claimed the inside track to victory on election eve, but girded their supporters to prepare for a photo finish in the hotly contested presidential contest
- The virus continued its unrelenting surge across the U.S., with cases soaring in key battleground states ahead of the presidential election. France reported record daily cases as large parts of Europe prepare for tougher measures to fight the pandemic
- Oil edged higher after jumping the most in three weeks on Monday on increasing signs OPEC+ will delay a planned easing of output cuts
- Gold held an advance to trade near $1,900 an ounce ahead of Tuesday’s U.S. election as uncertainty boosted demand for the haven asset
- The European Central Bank’s emergency bond purchases decelerated to the slowest pace on record last week, a sign that market demand for more stimulus is waning amid a rally in the region’s government debt
A quick look at global markets courtesy of NewsSquawk
Asian equity markets were higher across the board after following suit from the gains on Wall St where all major indices were lifted heading into the US election as polls continued to point to a Biden win and with stronger than expected global PMI data also adding to the constructive risk tone. ASX 200 (+1.9%) rallied throughout the session amid the RBA policy meeting where the central bank delivered a package of loosening measures including cutting key rates by 15bps as expected and a AUD 100bln boost to QE, with the broad upside led by the energy sector after oil prices rebounded on reports that Russia is considering postponing the tapering in OPEC+ cuts until the end of Q1. KOSPI (+1.9%) was also buoyed as participants shrugged off a negative inflation print and mixed vehicle sales data from South Korea’s top 2 automakers, while LG Display was among the notable gainers amid reports it is to supply mini-LEDs for Apple’s iPad. Hang Seng (+1.9%) and Shanghai Comp. (+1.4%) conformed to the upbeat risk tone after a mild liquidity injection by the PBoC and as all regional bourses joined the global rising tide, aside from Japanese markets which remained closed in observance of Culture Day.
Top Asian News
- Malaysia Holds Key Rate at Record-Low as Virus Threatens Growth
- Oil Giant Aramco Keeps Dividend Despite 45% Slump in Profit
- Australia’s RBA Cuts Rates, Announces A$100 Billion Bond Buying
- Thailand Approaches Former PMs to Head Reconciliation Panel
European cash equities trade with strong gains across the board (Euro Stoxx 50 +1.9%) after the region picked up the bullish APAC baton and as traders gear up for the US Presidential Election (full cheat sheet available in the Research Suite), with the latest betting odds from Betfair Exchange suggesting a rise in Trump’s re-election chances to 39% from 35%, whilst FiveThirtyEight overnight projected a Biden win at 89% vs. 10% for President Trump. Back to Europe, major bourses mostly experience broad-based gains with modest outperformance seen in the France’s CAC 40 (+2.1%) and Italy’s FTSE MIB (+2.2%) amid a firm performance in the banking sector - after BNP Paribas (+5.5%) posted a +30% YY increase in FICC revenues on the back of a “sharp rise in credit,” alongside a “rebound in forex and emerging markets and a good performance of rates.” As such, this has lifted the regional banking sector which resides as one of the top performers alongside the Basic Resources and Oil & Gas sectors, with the latter on account of rising oil prices. The other end of the spectrum sees some of the more defensive sectors including Health Care lagging on account of the overall risk-appetite, albeit Travel and Leisure continues to bear the brunt of the impact from nationwide lockdowns in Europe. In terms of individual movers, earnings see Pandora (+4%) and Hugo Boss (+4.8%) higher, with the latter also flagging “exceptionally strong” Chinese business in October. Looking at some M&A updates, Suez (+0.6%) failed to materially benefit from Veolia (+2.0%) confirming its intention to make a public takeover bid for Suez at EUR 18/shr. This came after Veolia announced around a month ago a 29.9% stake acquisition from Engie at the same price. Meanwhile, G4S (+4%) rejected the takeover proposal from Allied Universal.
Top European News
- U.K. Boosts Testing as Johnson Seeks Lockdown Exit Strategy
- Dutch Fall for Covid Conspiracies in Warning to Europe’s Leaders
- Italy Is Said to Ready $1.8 Billion in New Aid as Shutdowns Loom
- London Has to Shelve Cross-City Rail Line to Secure Tube Bailout
In FX, another bullish session in prospect for stocks, oil and other risk assets has enticed Buck bears back out of the woods, while the looming Presidential vote outcome is also keeping the Greenback on tenterhooks. Indeed, the DXY has faded just above 94.000 and ahead of Monday’s 94.285 peak to post a deeper low at 93.622 vs yesterday’s 93.871 base in the run up to relatively secondary US releases that fill the void before the primary issue is known or the vote proves too close to declare and is contested.
- AUD – The Aussie has reclaimed all and more of its knee-jerk post-RBA losses even though dovish expectations were exceeded by the Central Bank cutting the benchmark rate, 3 year yield target and TFF by 15 bp to 0.1%, while lowering the rate for Exchange Settlements to zero and unveiling a new Aud 100 bn QE remit for an initial 6 months and aimed at 5-10 year bonds. However, Aud/Usd has spiked from the low 0.7000 zone all the up to and just beyond 0.7100, while the Aud/Nzd cross has staged a firmer rebound from closer to 1.0600 towards 1.0675 as the Kiwi lags ahead of 0.6700 vs its US counterpart in advance of NZ labour data.
- CAD/GBP/EUR/CHF – Also forging gains largely at the expense of their US rival, but the Loonie also deriving more momentum from the ongoing recovery in oil as it probes through 1.3150 before Canadian trade on Wednesday. Meanwhile, Sterling is within striking distance of 1.3000 again and retesting 0.9000 offers/resistance against the Euro amidst unconfirmed reports that EU officials may have made a key concession to the UK on zonal attachment methodology in respect of fishing rights. Nevertheless, the single currency is equally close to 1.1700 vs the Dollar having breached the 100 DMA at 1.1661 and the Franc has pared declines from sub-0.9200 to 0.9160+ following in line Swiss CPI readings.
- JPY – The G10 underperformer, albeit without local sponsorship as Japanese markets celebrate Culture Day, as the Yen fails to sustain gains above 104.50 due to the aforementioned pick-up in risk appetite on the second day of November.
In commodities, WTI and Brent front month futures continue their upward trajectory in early EU hours following an overnight session of consolidation, with prices underpinned by sentiment and feeling a second wind from Russia’s comments yesterday which suggested the largest non-OPEC producer is actively discussing rolling over current output curbs through Q1 2021 as opposed to a wind-down from January. In terms of upcoming meetings, the JTC and JMMC are set to meet on Nov 16/17th – with source reports/leaks likely heading into and during the events, followed by the decision-making OPEC/OPEC+ meetings on Nov 30th/Dec 1st. Over in the Gulf of Mexico, operations are resuming following the passing of Hurricane Zeta, with BSEE’s latest estimate suggesting 28% (Prev. 46%) of oil and 16% (Prev. 20%) of natgas production still shut in. Price action in the crude complex will likely be dictated by overall market sentiment heading into election, barring any OPEC-specific headlines and the weekly Private Inventory report. WTI Dec and Brent Jan hover off session highs around 38/bbl (vs. low USD 36.57/bbl) and USD 40/bbl (vs. low 38.65/bbl) respectively. Elsewhere spot gold and spot silver benefit from the Dollar’s decline despite the earlier positive correlation, with the yellow metal retesting USD 1900/oz to the upside at the time of writing, whilst spot silver regained a footing above USD 24/oz. Finally, LME copper trades firmer as the red metal coattails on risk appetite and benefits from the softer Dollar.
US Event Calendar
- 10am: Factory Orders, est. 1.0%, prior 0.7%; Factory Orders Ex Trans, est. 0.55%, prior 0.7%
- 10am: Durable Goods Orders, est. 1.9%, prior 1.9%; Durables Ex Transportation, est. 0.8%, prior 0.8%
- 10am: Cap Goods Orders Nondef Ex Air, est. 1.0%, prior 1.0%; Cap Goods Ship Nondef Ex Air, prior 0.3%
- Wards Total Vehicle Sales, est. 16.5m, prior 16.3m
DB's Jim Reid concludes the overnight wrap
US Election Day is finally here. It comes 9 months after the first primaries were held back in February, and caps off an astonishing campaign that has witnessed the arrival and spread of Covid-19, the end of the longest-ever economic expansion, racial unrest throughout the country, and the installation of a new Supreme Court Justice in near record time. And as well as the all-important presidential race, congressional elections for both the House of Representatives and the Senate are also taking place today that will have a major impact on the ability of the new president to enact their agenda.
To give you the context heading into tonight, the final polling averages place former Vice President Biden clearly ahead of President Trump, with an +8.4pt lead in FiveThirtyEight’s average, and a +6.7pt lead in RealClearPolitics’ one. And for reference, that’s noticeably larger than the lead Hillary Clinton had in polling averages back in 2016 (around +3pts). Nevertheless, the US President is determined not by the national popular vote, but by the Electoral College, and it’s true to say that matters are somewhat tighter there than the national polling would imply, since Mr. Biden’s lead in the likely tipping-point state of Pennsylvania is just +4.5pts and +2.6pts in the two averages.
In terms of timings, the first polls will close in parts of Indiana and Kentucky at 11:30pm London time, but given neither of these are battleground states, the real action will begin at midnight when polls close in Georgia as well as parts of Florida. Then at half past midnight, we’ll begin to get results from the other swing states of Ohio and North Carolina, before 01:00 sees polls close in Pennsylvania along with the rest of Florida. If Mr. Biden were to take any of Florida, Ohio or North Carolina it would likely be game-over for President Trump, as all 3 states are critical to Mr. Trump’s map in a way they simply aren’t for Mr. Biden. Florida is also a must-watch as mail-in votes there must be received by Election Day, so all the early ballots cast are expected to be tabulated by 01:30, meaning that we could have a winner declared by 05:00 tomorrow morning in what is a critical state for the president.
However, if Mr. Trump is ahead in those three states (FL, OH, NC) or running competitively, attention will likely turn to the Midwestern states and Pennsylvania, as he’ll need some further wins here in order to reach the winning line of 270 electoral votes. But in Pennsylvania, two counties that account for 117k requested mail-in ballots have already said they won’t begin to count those ballots until tomorrow, so if it does come down to the result there, it could be some days before we know the final outcome. So whether we’ll be able to bring you the results in tomorrow’s EMR will all depend on how close the election is. In the last 3 elections, we either had the result by morning or the writing was very clearly on the wall as to which candidate would emerge victorious. If it’s a repeat of 2000, however, it could be over a month before we actually know who the next president is.
From a market perspective, it’s important to remember that it’s not just the presidential result that matters, but also who controls both houses of Congress, as that will affect the ability of the new president to pass legislation, not least on whether we’ll get a major stimulus package in Q1 of next year. While the House of Representatives is seen as an incredibly likely win for the Democrats (97% in the FiveThirtyEight Model), their chances in the Senate stand at a noticeably lower 74%, so there remains the possibility that we could get a Republican Senate alongside a Biden White House. Indeed, our US economists view that as the most negative outcome for growth next year, because Republican senators would likely remain resistant to a big fiscal package, as they’ve already done in recent weeks even with Mr. Trump in the White House. This contrasts with their view on a Democratic sweep of the presidency and both houses of Congress, which they see as providing the most fiscal stimulus to the economy next year. So it’s clear that control of the Senate will be critical to the policy mix we can expect to see in 2021.
Currently the Senate is split 53-47 to the Republicans, and in the event of a 50-50 tie, the Vice President casts the deciding vote. So that means to win control of the chamber, the Democrats would need to take a further 3 seats if Mr. Biden wins the presidency, and 4 seats if President Trump is re-elected. With Democrats likely to lose a seat in Alabama, the five key races to watch for Senate control will be in Arizona, Colorado, Iowa, Maine and North Carolina. It’s also worth noting that in Georgia, one of the races is a special election in which numerous candidates are running from both parties (no primary election took place) and none are expected to get the 50% + 1 votes needed to avoid a runoff under Georgia rules. The other Senate race in the state is also very close, with a chance of a third-party candidate keeping the winner under 50%, triggering a runoff as well. Those runoffs wouldn’t take place until January 5, so in the event that control of the Senate were not clear, then majority control could come down to runoff elections in a single state in January.
In the graph in the body of today’s EMR we show the three-day intra-day move of 10-year treasuries and the US dollar between election day and the day after the results came through. Interestingly between polls closing and 13:00 the day following the election, 10-year US treasuries sold off nearly 40bps as the market fear over a Trump victory turned exceptionally quickly to one of reflation. 10 days after the election they were +64bps higher than the intra-day Asian market lows on election night. That we haven’t actually got inflation is an interesting postscript but could this election be the tipping point to genuine MMT? The point of the graph is to indicate that big moves can happen around such events. Although we don’t have the Asian session data from 4-years ago, S&P futures fell -5% overnight on election night in the initial response to Mr. Trump’s victory, causing circuit breakers to pause trading, before sharply rallying to finish the day +6.1% higher than these lows.
Ahead of this critical election for markets, global equity indices rebounded yesterday as they recovered from last week’s sell-off, and by the close the S&P 500 had risen +1.23% as part of a broad-based rally that saw nearly 90% of the index move higher. Tech struggled to keep pace with the NASDAQ moving between gains and losses before finishing up +0.42%. Volatility remained elevated, however, amidst the uncertainty over both the election and Covid-19, and the VIX index fell just -0.9pts to 37.1pts, which is still above its closing levels throughout the entirety of Q3. Over in Europe meanwhile, indices saw even larger advances, and the Stoxx 600 (+1.61%), the DAX (+2.01%) and the CAC 40 (+2.11%) all performed strongly.
The strong performance extended across multiple asset classes, with sovereign bonds rallying on both sides of the Atlantic. Yields on 10yr Treasuries fell -3.0bps to 0.843%, while those on bunds (-1.3bps), OATs (-1.1bps) and gilts (-4.3bps) similarly declined. For bund yields, that decline took them to their lowest level since March, and over in southern Europe, yields on Spanish debt also fell -1.4bps to a 1-year low.
Asian markets have tracked Wall Street’s lead this morning with the Hang Seng (+2.08%), Shanghai Comp (+1.13%), Kospi (+1.45%) and ASX (+1.93%) all up. S&P 500 futures are also up +0.42% ahead of the election. Japanese markets are closed for a holiday. In Fx, the Australian dollar is down -0.21% as the RBA reduced the cash rate by 15bps to 0.10% and said that it planned to buy AUD 100bn of 5y-10y bonds over the next 6 months. More than expected.
Though the coronavirus is likely to be somewhat lower down the headlines over the next couple of days, further restrictions were imposed in Europe yesterday as Italy announced a new three-tiered system in order to avoid another national lockdown. Shopping malls will close during weekends across the country, while secondary schools will be shut and Museums will close nationally. Other than these measures, Prime Minister Conte is resisting a full national lockdown. In the U.K. it was announced late last night that the city of Liverpool will be the first to have mass rapid testing on the population with the hope that this can be rolled out nationally in the weeks ahead. On the eve of the election in the US, Massachusetts Governor Baker has instituted new restrictions in his state. Residents are to stay home between 10 p.m. and 5 a.m. except for essential activities, and many businesses will therefore shut at 9:30 pm and indoor gatherings at private residences are limited to 10 people. This comes as multiple states in the Midwest announced positivity rates in the double digits and hospitalisations in Houston, Texas are back at August levels. Click on ‘view report’ above to see the usual COVID-19 tables at the end of the PDF.
The main data highlight yesterday were the release of the October manufacturing PMIs from around the world. The ISM manufacturing reading in the US surpassed expectations to reach a 2-year high of 59.3 (vs. 56.0 expected), and the employment index also rose to 53.2, its highest since June 2019. Over in Europe the final manufacturing PMIs saw some slight upward revisions from the flash prints, with the Euro Area reading at 54.8 (vs. flash 54.4), and the German PMI at 58.2 (vs. flash 58). The problem is that this is backward looking now and also reflects a manufacturing sector less lockdown than services (80-90% of most western economies) are now starting to be.
To the day ahead now, and though all eyes will be on the US election, there’ll also be data on US factory orders for September and the ECB’s Knot will be speaking. Good luck resting ahead of a big night ahead.