Written by: Craig Erlam | OANDA Europe
Election day has finally arrived and investors are in no way put off at the prospect of the volatility surges you would expect will accompany it.
Investors would be forgiven for taking to the sidelines on a day like this but what we're seeing is far from it. Europe is making strong gains for a second day, with France's CAC and Italy’s FTSE MIB leading the way up more than 2% and taking huge chunks out of last week's losses. US futures are seeing similar gains and setting us up for a strong open on Wall Street shortly.
So why the positivity when there's so much event risk this week, including potentially the most controversial Presidential election in decades. Well, I think trading over the last few weeks has a lot to do with it. The Dow fell 6% last week and the two the preceded it weren't particularly good either. It seems the positioning ahead of the election has already been very risk averse, heavily aided by Covid lockdowns.
So perhaps some investors are sensing opportunity ahead of the polls closing. Naturally it helps when one candidate has a hefty lead in the polls which reduces the possibility that the result will be contested. This could bring considerable uncertainty in the coming weeks, and at the worst possible time.
The polls certainly seem to indicate that the race for the White House is almost a foregone conclusion. But if I've learned anything about Trump, it's that he won't take defeat lightly and he can't be counted out. I fear it may not be as straightforward as the markets seem to suggest.
And that's before we question whether markets are as comfortable with Biden as they've appeared and we've all tried to justify. Four years ago, the markets appeared to perceive Trump as a threat and the consensus leading up to the election was that he would hold them back. And we all know what happened next. Could the inverse be true this week?
What looks certain is that it's going to be a wild couple of days, made all the more complicated by the huge numbers of postal voting for obvious reasons. With around 100 million people having already voted, turnout is looking to be huge and we may have to wait a little longer for results.
Exit polls may give us some early insight but how reliable will that be? Now more than ever, collecting that data because of early in-person and postal voting must be a nightmare. Will markets react to early exit polls? If so, this will only add to the volatility as the final results may look very different.
And to think, this is only one of this week’s major risk events, albeit certainly the most important. The Fed and BoE on Thursday will naturally be huge given the role central banks have to play in the final weeks of the year. And Friday’s jobs report has almost fallen off the radar. Not to mention Covid, which is forcing Europe back into lockdown and onto the brink of a double dip recession. The race to save Christmas is on.
Will USD remain safe haven if election turns sour?
Currency markets will naturally be very volatile over the next couple of days and while the dollar will bear the brunt of much of this, the impact will be felt further afield. The dollar's role as a safe haven has been clear for all to see, this year in particular, to the detriment of gold. It will be interesting to see if that continues this week given that the US would be at the centre of the uncertainty.
It will be interesting to keep tabs on the other safe haven currencies over the next couple of days as we look to take the pulse of traders as the results appear. On the flip side, AUD, CAD and NZD could do well if markets are satisfied with the outcome, meaning a potential downside risk for the markets has passed without too much disruption.
The yuan will be another interesting one to watch, given the Trump administration's increasingly hawkish approach towards China. A biden victory should be quite good for the currency, even if Biden can't politically afford to go easy on them. You would expect to see less unilateral action from the US though which should suit the currency.
There isn't much to update on the Brexit side which means the pound is continuing to consolidate around 1.30. It's making decent gains against the dollar today although they are primarily being driven by the latter. I remain optimistic that a deal will be reached and I think it's probably quite heavily priced in at this point.
Oil rebounds as OPEC+ prepares defence
Oil prices rebounded strongly on Tuesday and are adding to gains today after reports that Russian Energy Minister Alexander Novak has spoken with the heads of major oil companies to discuss the extension of production cuts.
The move comes as Europe is rapidly going into lockdown again and US cases are surging, increasing the probability of more restrictions there as well. That will take a huge toll on crude demand over the winter just as OPEC+ was planning to reduce cuts to 5.7 million barrels from 7.7 currently.
A postponement has looked highly likely for weeks and these reports further support that. Saudi Energy Minister has previously stated that the group will do what it needs to and this is the obvious solution.
WTI rebounded more than 10% following the reports and even managed to fly through $37. Brent also saw a massive response and climbed back above $40, where it is currently trading. These are big levels as far as both are concerned and the market may need more details if they’re going to hold.
Gold back in favour, for now
Gold is pushing for a third straight day of gains as it tries to recapture $1,900. The yellow metal has been weighed down by risk aversion in the market but that has turned more positive so far this week, giving it a boost along the way.
It remains very sensitive to the dollar and could therefore be in for a wild ride over the next couple of days. Major support continues to be $1,850-1,860 where it has been well protected over the last few months. This continues to look vulnerable though and further bursts of risk aversion could see it come under pressure once again.
It will be interesting to see how the yellow metal responds in the event of a Biden victory, especially if the Democrats take the Senate as well. Not only is gold traditionally a safe haven, it’s an inflation hedge as well and a blue wave would surely mean massive fiscal stimulus, maybe even higher than Pelosi was pushing for in recent negotiations.
To the upside, $1,930 is key and a break of this level may indicate a big sentiment shift in these markets and be the catalyst for another run towards $2,000.
Related: Investors May Take To the Sidelines as We Await Early Results From the Election