November kicks off with one of the most closely watched elections in US history, widespread COVID-19 lockdowns in Europe, three central bank monetary policy announcements and labor market reports from the US, Canada and New Zealand. Despite all of these big events and the uncertainty, the Dow Jones Industrial Average rebounded after last week’s losses. The US dollar traded higher against the euro, Japanese yen and other major currencies. While its hard to justify optimism, this price action reflects the market’s hope for a definitive election outcome on Wednesday.
Unfortunately, in times like this, its hard to forget the Bush vs. Gore election in 2000 which was undecided until December 12th. At the time, the recount involved only one state (Florida), and this time, mail in ballots could decide the vote in Pennsylvania, North Carolina and Wisconsin. More than 96 million Americans have already cast their ballots early and in some states, that exceeds the total amount of votes cast on Election Day. With 24 hours until election night, Joe Biden’s lead is shrinking in battleground states. The final polls show a tightening race and we’d be lucky if the winner is determined by the end of the week.
Only one thing is certain and that’s a volatile 48 to 72 hours for the financial markets. In 2016, the polls predicted a win by Clinton but when a Trump victory became apparent, Dow futures dropped 750 points in late night trading. However by 4:30am ET, stocks bottomed and went on to hit fresh record highs on Wednesday. In the forex market, EUR/USD shot up 300 points from 1.10 to 1.13 on election night only to U-turn, give up all of its gains to end Wednesday near 1.09. Similarly big moves were seen in USD/JPY which dropped like a rock when the results became clear. USD/JPY fell from 105.47 down to 101.20 in Asia trade before rallying strongly in the NY session to settle just under 106.
The beginning of the month is typically a busy one but with the US election causing moves that we see once every few years, monetary policy meetings could take a back seat. With that said, two thirds of economists surveyed expect the Reserve Bank of Australia to lower interest rates this evening. Economic data from Australia hasn’t been terrible—manufacturing activity rebounded sharply in October, building permits and ANZ job ads are up. The country ended its 2-month-long lockdown last month and reported zero local coronavirus cases for the first time in 5 months, after successfully beating off a second wave. Nonetheless with Chinese trade tensions escalating, the RBA could be prompted to act. China banned imports of timber, barley, copper, lobster and sugar among other items. Although the economy is on a recovery track, the RBA has long suggested that a rate cut would be more effective when restrictions were lifted, which explains why so many economists are looking for a move now. Even if they ease, it is likely to be accompanied by a more upbeat outlook from the central bank.
The Bank of England is also expected to increase monetary stimulus this week but no action is expected from the Federal Reserve. Despite daily coronavirus cases topping 99,000 on Friday, US data has been good because the government has not taken steps to control the virus spread. Manufacturing activity grew at its fastest pace in 2 years according to ISM and there’s reason to expect similar strength in services. The employment component of the report also rose back above 50, which means companies in that sector are adding more jobs than cutting them.