By Benjamin Picton, Senior Macro Strategist at Rabobank
RealClearPolitics’s polling average now has the candidates in a dead-heat at 48.5 each, but Trump is still marginally favored on the ‘no toss-ups’ polling of battleground states. Allegations of funny business in the polling aside (see yesterday’s publication for more on that), the race looks extremely tight and we could be headed for a 2000-style scenario where there is no clear winner for quite some time.
The DXY index had been losing ground as polling and prediction markets drifted favorably for Harris over the weekend, but the move reversed yesterday in lockstep with prediction market odds. US 2-year yields fell by ~5bps and 10-year yields were down almost 10bps yesterday. Stock indices were lower throughout Europe and the USA, but the UK’s FTSE100 managed to eke out a small gain that may be somewhat idiosyncratic as the nation continues to digest Chancellor Reeves’ big taxing, big spending budget.
The risk-off price action seems to suggest that traders are bracing themselves for a contested result, or perhaps no clear result in the short term. EURUSD 1-month volatility is sitting close to 20-month highs while USDMXN 1-month vols are at their highest level since the initial Covid shock in early 2020.
The potential lack of a clear winner has other potential implications. Yeshiva World News is reporting comments from a Senior Fellow with The Washington Institute suggesting that Iran is poised to attack Israel with approximately 400 of its most advanced missiles stationed in Iraq and Syria. According to YWN’s source, the attack is expected to coincide with the closure of polls in the United States to capitalise on leadership uncertainty and confusion surrounding who might have won a mandate for their approach to national security matters.
If this were to transpire it would probably be Kryptonite for financial markets, which typically abhor uncertainty (just ask the UK Chancellor). There is also a very serious question over whether Israel might decide to strike Iranian assets in Syria and Iraq pre-emptively to limit potential damage. It’s worth recalling that this is the approach that Israel took with Hezbollah in Lebanon just a few weeks ago.
Timing the market is a mug’s game, but the point is that one doesn’t have to look too far to find potential points of fragility if the right catalyst were to come along. Perhaps that’s part of the reason why Warren Buffet has recently sold down positions and increased his cash holdings?
Global risks and fragility in asset prices will be on the minds of Reserve Bank of Australia Board members when they finalise their November policy rate decision later today. This is the second-last meeting of 2024, and had been pencilled in for a cut by some local banks as recently as mid-September. Those analysts have now pushed their cut forecasts back to February of next year, but the OIS futures are less optimistic and only see a February cut as a ~50-50 probability.
The futures strip now has May 2025 as the first month where a 25bps cut is fully-priced, which happens to accord with RaboResearch’s forecast issued in early August. We’ve been more hawkish than most others for most of 2023 & 2024, but suddenly find ourselves in the unusual position of being more dovish on the outlook for the policy rate than the futures market from July next year onwards.
Why is that? We have a house view that Donald Trump will win the election and implement his policy of universal tariffs. We view this as inflationary over the long-run, and inflationary inside the United States in the short run, but for medium-sized opening trading economies like Australia there could be a short-run disinflationary shock as goods that would normally find their way to US consumers are suddenly dumped in markets where access remains favourable.
In a mercantilist world of trade tariffs, divergent national economic outcomes are likely to become more of a feature than they have been in the recent past.
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