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Election Gameplan!

Election Gameplan!

Sagar Singh Setia's avatar
Sagar Singh Setia
Nov 01, 2024
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Marquee Finance by Sagar
Marquee Finance by Sagar
Election Gameplan!
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Last week, we wrote about the possibility of vol explosions across assets as we near the action-packed fortnight. The results of the events have been as follows:

  1. Israel retaliated last week. However, it avoided oil and nuclear facilities, which gave a breather to the oil markets as oil prices plunged. Nonetheless, the story is not over yet, as there are murmurs about Iran’s counter-attack before the US elections. Bottom Line: Uncertainty persists.

  2. Big Tech Earnings: Out of the six big tech companies that reported earnings this week, nearly half (MSFT, AAPL, META) missed expectations and disappointed the street, whereas the other half (TSLA, GOOG, AMZN) beat expectations, but the reaction so far (Ex-TSLA) has been muted. With the SMCI bombshell, semis have also been under pressure. Thus, we can say that the event has passed out. Bottom Line: Upside Capped.

  3. Elections: As the election date approaches, things are heating up in the political arena. With the market positioned for a Republican Sweep, any surprises can lead to an outsized move across assets. Bottom Line: Uncertainty persists.

As a result of the above events, the volatility, as we mentioned last week, has surged across assets:

  • MOVE Index: The bond market volatility has surged to fresh 52-week highs as the market anticipated more than a 20 bps swing on the 10Y on the 5th/6th Nov post-election verdict.

    Source: Bianco Research

  • VIX: Volatility in equity markets also surged, with the VIX printing a 22-handle post disappointing Mag 6 earnings. We expect the VIX to remain elevated unless the election results are announced. If we exclude the week of August 5, VIX is now the highest since October last year when the markets bottomed out. There can be a surge again on Monday/Tuesday, so one must be cautious.

  • FX Vol: With the BOJ meeting this week and the historic UK budget, FX vol has also risen substantially, especially after the markets were rocked by concerns about higher borrowings in the UK. USDJPY also came down from the highs after the BOJ hinted about a possible rate hike. We expect heightened volatility in the FX markets, especially in the pairs exposed to Trump's tariffs (more later). Furthermore, we can’t dismiss the fact that we also have the Fed policy next week.

Due to upcoming events and high volatility in the global financial markets, we are deviating from our plan for the last 24 months to update everybody about the portfolio on the last Friday/Saturday.

Today, we will focus on one of the most significant events of the past few years, which will profoundly impact cross-asset movement and the future trajectory of central bank policies (globally) and geopolitics.

We will also examine some of the global macro data released this week, with an emphasis on the US labour market.


US!

Let us begin with the macro data in the US.

ISM Manufacturing is our preferred gauge to track cyclical activity in the US.

The headline number came in below expectations at 46.5. However, we like to focus on our favourite indicator: New Orders Less Inventories.

New Orders Less Inventories sets the trend for the ISM Manufacturing PMI, however it has been really volatile in the past few months. It’s once again indicating a rise in the ISM Manufacturing PMI in the coming months.

Nonetheless, we would wait for a clear trend to emerge before concluding anything. Digging deeper, the ISM Prices have rebounded sharply, demonstrating the pricing pressures faced by businesses.

Furthermore, the ISM Employment remains subdued at 44.4, which is consistent with a weak labour market in cyclical industries.

The Fed’s preferred inflation measure has been PCE. The finer details lay out some interesting facts:

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