A turbulent week expected as US election spurs market volatility

The US presidential election is set to drive significant market volatility this week, as investors brace for risk hedging and position adjustments depending on the outcome.

However, once the results are in, market attention is likely to shift back to economic events, such as the Federal Reserve (Fed), Bank of England (BoE), and Reserve Bank of Australia (RBA) rate decisions. Additionally, Chinese economic data, including new yuan loans and inflation readings, will be in focus.

Europe

With limited data releases in Europe this week, global events are expected to be the primary force influencing European market trends. 

On Monday, S&P Global will publish final manufacturing PMI figures for October from major Eurozone economies, including Spain, Italy, France, and Germany.

Preliminary data indicated ongoing contractions in most countries’ manufacturing sectors, with Germany’s activity being the weakest. Spain, however, stands out as the strongest, with manufacturing activity expanding since March.

Services PMIs will follow on Wednesday, where growth is expected across most countries for October. France, though, is an exception, with services activity contracting for a second month amid an Olympic-linked economic cooldown.

The weak economic backdrop may continue to pressure the euro against the US dollar, despite a rebound last week.

Election-related dynamics could lend support to the dollar, compounded by persistent economic weaknesses in the eurozone. If signs of stability in the US economy emerge, the dollar may strengthen further.

In the UK, the BoE is expected to reduce its interest rate by 0.25%, bringing it to 4.75%. This would be the second rate cut this year, following September’s year-on-year headline inflation decrease from 2.2% to 1.7%.

Nonetheless, the bank may adopt a hawkish tone given last week’s Budget, which is likely to push inflation higher due to considerable tax increases. However, the US election’s impact could prompt the BoE to manage political risks with a rate cut this week.

United States

The US election remains too close to call, with opinion polls indicating an exceptionally tight race between Trump and Harris.

Last week, signs of the Trump Trade unwinding emerged as gold, the dollar, and cryptocurrencies retreated from recent highs.

However, a Trump re-election could see this trend reverse. Conversely, a Harris victory may prolong the unwinding, causing the dollar to fall.

Some analysts believe that prevailing market trends may revert once the results are known, as certainty could prompt the rebalancing of hedged positions. In any case, volatility seems assured, as seen by the CBOE Volatility Index reaching a four-month high.

The Fed is also set to announce its rate decision after the election, adding to market volatility. It is expected to reduce rates by 0.25% despite last Friday’s weaker-than-expected job report.

Unless there any election surprises or post-election developments that raise concerns about US economic growth, the Fed is unlikely to alter its stance. A relatively hawkish Fed would underpin a strong dollar and be likely to support the US stock markets.

Asia-Pacific

In the Asia-Pacific region, the RBA is anticipated to hold interest rates steady at 4.35% after last week’s inflation data. Australia’s headline inflation cooled to 2.8% in Q3, and 2.1% for September, within the 2-3% target range.

However, the RBA is expected to prioritise quarterly over monthly data, maintaining current rates. Markets anticipate the RBA could begin easing early next year, lowering expectations of a December cut.

In China, reports are due on new yuan loans, CPI, and PPI for September. The consensus forecasts a decline in bank lending to 770 billion yuan (€99.6bn) from August’s 1.6 trillion yuan.

Inflation is anticipated to continue a mild year-on-year rise of 0.3%, while PPI is expected to fall by 2.5%, marking a two-year contraction despite ongoing stimulus efforts.