U.S. Markets Gear Up for Elections and Fed Meeting
As the U.S. approaches a significant week, investors are preparing for two major events that could significantly impact financial markets. The presidential election on November 5 is drawing attention as the race intensifies between Republican Donald Trump and Democrat Kamala Harris. Market fluctuations are observed, with changes in asset prices reflecting a belief that Trump is gaining ground in his presidential bid.
The "Trump trade," characterized by a strengthening U.S. dollar, a drop in Treasury bonds, and an increase in Bitcoin value, is supported by investor sentiment and robust economic indicators, alongside hopes for deregulation in the cryptocurrency sector under a potential Trump administration. However, polls remain competitive, and bets in favor of Trump have decreased heading into the weekend.
Walter Todd, the investment manager at Greenwood Capital, indicated that volatility is expected regardless of the election outcome. He suggested that a Republican victory could lead to profit-taking in Trump-associated trades, while a win for Democrats could result in a more pronounced reversal in these trades.
The election will also determine control of Congress, adding an additional layer of complexity for investors as they evaluate the long-term impact on assets. The two presidential candidates present markedly different economic paths; Trump is likely to pursue deregulation, which could benefit banks and small businesses, while Harris is expected to support clean energy initiatives, potentially boosting renewable energy stocks.
In addition to the election, the Federal Reserve's monetary policy decision, set to be announced on Thursday, is another event on investors' radar. Despite the S&P 500 index rising 20% this year, the index ended October with a loss following mixed earnings reports from technology companies after five consecutive months of gains.
According to the futures market for Fed funds, markets anticipate a modest 25 basis point interest rate cut from the U.S. central bank. This follows the first rate cut in four years in September. Investors will be closely monitoring Fed Chair Jerome Powell for guidance regarding the possibility of halting future rate cuts, especially in light of recent strong economic data.
Citigroup's economic surprise index reached its highest level since April, bolstered by data showing a solid 2.8% growth in the U.S. economy in the third quarter. However, the monthly employment report for October painted a less optimistic picture, with job growth nearly stagnating. These figures were affected by strikes in the aviation sector and hurricanes.
JPMorgan economist Michael Feroli noted that the week’s data supports the case for a rate cut and advised caution in interpreting the Fed's forward guidance due to uncertainties surrounding the election outcome.