US Election Impacts Global Markets

Voting for the US Presidential race commenced early this morning, and with a close race anticipated, it could be some time before a definitive result is declared. This uncertainty is likely to trigger market volatility, with reactions to headlines on the progress of votes expected. The US economy's robust performance, as indicated by a solid October ISM services purchasing managers' index (PMI), provides further context for market movements, particularly with a looming Fed policy meeting scheduled for early Friday morning (AEDT).

Market Reactions to US Election

US equities experienced a rally, with the S&P 500 marking its most significant daily gain in almost seven weeks. The S&P 500 saw a 1.1% increase, while the NASDAQ and Dow Jones rose by 1.4% and 1.0%, respectively. This positive sentiment was fueled by the robust services activity data in the US, bolstering the case for sustained earnings growth, a crucial factor underpinning current valuations. This strength extended to European markets as well, with the Euro Stoxx 50 gaining 0.4% and the German Dax adding 0.6%. However, the UK's FTSE 100 bucked the trend, dipping 0.1% lower.

Global Markets Performance

Across Asian equity markets, a risk-on sentiment prevailed, though the ASX 200 deviated, slipping 0.4%. Overnight, ASX futures showed a 0.7% increase. China's Hang Seng and CSI 300 indices experienced notable gains, reaching 2.1% and 2.5%, respectively. Japanese shares also climbed by 1.1%.

Interest Rate Outlook

Treasury yields demonstrated a mixed performance, ranging from flat to higher across the 2-10-year curve, with longer tenors outperforming. The 2-year yield rose 4 basis points to 4.20% at the time of writing, while the 10-year yield remained unchanged at 4.29%. The 10-30-year yield curve continued its sharp flattening trend, settling around 20 basis points below September's highs. The market is currently pricing in a high probability (around 90%) of a Fed rate cut on Friday morning, with a subsequent move in December having a 50% probability.

Bond Market Performance

Soft demand during a UK 10-year bond auction led to underperformance for Gilts, with yields increasing 8 and 7 basis points for the 2- and 10-year tenors, respectively. Aussie bond futures, however, remained relatively stable this morning, following a sell-off in physical yields yesterday that saw the 10-year yield hit a fresh high since November 2023. The 3-year futures yield stayed flat at 4.08%, while the 10-year yield dipped 1 basis point to 4.57%.

RBA Rate Cut Expectations

Following the RBA's meeting and unchanged guidance yesterday, expectations for RBA rate cuts have shifted further out. A February 2025 cut is now priced in with a 30% probability, while a May cut is only fully priced in. This shift reflects the RBA's stance of maintaining a patient approach, waiting for a clear indication that inflation is sustainably trending towards the center of their inflation target before loosening policy restrictions.

Currency Movements

Despite buoyant US yields, the US dollar continued to weaken against most G-10 peers. The DXY index declined from a high of 103.96 to a 3-week low of 103.37 and is currently trading around 103.44. This represents a full big figure drop from October's highs and is expected to exhibit substantial swings in the coming days, influenced by US election headlines. The Aussie dollar has bounced back significantly from its base around 0.6540, exceeding 66 cents yesterday, a level it has struggled to breach in recent sessions. The AUD/USD rose from a low of 0.6579 to a high of 0.6642 and is currently trading marginally below the day's high. The RBA's patient approach is providing a solid yield foundation for the Aussie, but this is capped by US election risk and concerns regarding policy support from China. Once these uncertainties become clearer, the near-term directional impetus will become more apparent.

Commodities Performance

Crude oil markets extended their gains of recent days, with the focus shifting to the US election and the approach of Tropical Storm Rafael, which forced Chevron and Shell to shut down production in the Gulf. West Texas Intermediate (WTI) futures are up 0.8% at US$72.06. Bloomberg forecasts that Rafael's trajectory could impact as much as 1.7m barrels per day of oil and 1.8b cubic feet per day of gas production in the Gulf, based on the storm's projected path. Metals also benefitted from hopes for a Chinese stimulus announcement anticipated following the US election results. Copper rose another 0.3% to US$9,623, while aluminum jumped 1.5% to US$2,659, and zinc gained 2.5% to US$3,110.

Iron Ore and China's Stimulus

Iron ore markets surged above US$105, buoyed by optimism surrounding China's potential stimulus announcement. Futures are up 1.4% at US$105.35. This bullish sentiment stems from the stronger-than-expected October Caixin services purchasing managers' index (PMI) in China, which rose to 52.0 from 50.3 in September, exceeding expectations for a reading of 50.5. This marked the strongest reading in three months and suggests that recent policy announcements might be positively influencing sentiment. However, it's too early to draw firm conclusions about the effectiveness of these measures. The bounce in services activity could be an early sign that recent policy announcements are turning the tide on sentiment, but it’s much too early to conclude for sure.

Key Economic Developments

The US economy remains strong, as evidenced by the jump in the ISM services PMI to its highest level since July 2022 in October. The headline index climbed to 56.0 in October, up from 54.9 in the previous month. The employment component rebounded from below neutral to 53.0, its highest level since August last year. While the new orders component declined after a surge in the previous month, it remained at a high level. The prices paid index also eased moderately but remained above the 50 threshold, suggesting that over half of the surveyed businesses experienced an increase in input costs. However, the prices paid index was in line with the average for 2024 so far. This suggests that while inflation remains a concern, it is not accelerating significantly. The trade deficit widened by nearly $14 billion in September to $84.4 billion, the highest since April 2022. The widening deficit was mainly driven by increased goods imports, which climbed 4.0% in the month and 9.3% over the year, indicating robust domestic demand. Meanwhile, exports fell 1.8% compared to August, but were essentially flat on an annual basis.

Conclusion: A Wait-and-See Approach

While the US economy shows signs of strength, the US election's outcome will continue to be a key driver of market sentiment in the near term. The RBA's patient approach to interest rate decisions and the anticipation of Chinese stimulus measures add further layers of complexity. Investors are likely to adopt a wait-and-see approach, closely monitoring these developments for their potential impact on global markets.