US Election Polls and OPEC Steer Dollar, WTI

US indices started the week poorly on Monday, 4 November, as investors shifted focus to weekend polls showing a tightening contest between former President Donald Trump and current Vice President Kamala Harris. The S&P 500 (ES) and tech-heavy Nasdaq (NQ) fell 0.3% each, and Dow Jones (YM) lost 0.6% as the stalemate witnessed in battleground states increased market uncertainty. 

Iowa polls resulted in the unwinding of recent “Trump trades”, sending the US dollar (DX) and Bitcoin(BTCUSD) lower during Monday trading. However, Trump’s own Trump Media & Technology Group (DJT) spiked 12.4% higher along with the index Russell 2000 (RTY), posting a marginal increase of 0.4%, as the pricing in of lower interest rates may benefit the small-cap index more. (Source: Reuters)

Meanwhile, the biggest gainer in the S&P 500 was the energy sector, led by a 1.87% increase in oil (CL) prices following OPEC’s decision to delay output production.

With the polls getting tighter in a week full of political dominance and monetary policy decisions by central banks, volatility is expected to be high. Wall Street’s own “Fear Gauge” traded near a 2-month high at 21.94, suggesting cautiousness until the US government picture clears out.

Election Dynamics Shift After Iowa Polls

Before the weekend Republican-leaning Iowa polls, where Harris was seen leading Trump 47% to 44%, analysts at JPMorgan (JPM) attributed the rise in the dollar to expectations of a Republican sweep, where Republicans win both the House and Congress. Under the “Trump Trade”, the greenback traded to the upside on expectations that Trump’s policies would force the Fed to hike. However, Monday was a warning call to investors as government yields dropped after the “gold standard” of Iowa polls, narrowing the gap between market expectations and polls.

Following yesterday, odds on betting platforms have decreased from 64% last week to just 54% due to support from female voters. This has also been driven by a surprise lead in North Carolina and Georgia as Harris tries to win over Wisconsin, Michigan, and Pennsylvania. The two candidates remain in battle to win the “blue wall”, the seven swing states, including Nevada and Arizona.

Analysts at Citi (C) expect a Trump victory to boost the US dollar by over 3% and a Harris win by around 2%. However, the Iowa polls added uncertainty about who will take control of both the House and the Senate, raising speculation about a divided Congress. Although policies would differ, analysts still expect an upside for equity markets. However, with a Republican-controlled Congress, there would be more catalysts for continued upside versus a simple relief rally under a Democrat House.

Oil Higher Despite Election Uncertainty

Oil prices increased over 3% on Monday after OPEC+ announced on Sunday it would postpone a planned output cut of 2.2 million barrels per day (bpd) from December to January due to falling oil prices and soft demand primarily from China. The organisation was expected to increase oil production by 180,000 bpd but decided to delay output amid a resolved crisis in Libya and an increase in Iranian oil production. The former produces around 1.5 million bpd, whereas the latter announced plans to raise output by 250,000 bpd. 

Some analysts argue that OPEC+'s move to support prices over market share just ahead of the US presidential election makes sense as they wait to see who wins the battle. A Trump win, who is a proponent of oil and gas, would pressure the Chinese economy at a time when oil demand in the country points downward. However, JPM analysts believe this may be a reason for the Chinese to provide a more substantial stimulus package during its NPC this week. Recent reports suggest at least $1.4 trillion in new spending. Notably, a Trump win is expected to boost oil drilling, resulting in an upside in oil stocks, at least initially.

The rise in oil prices on Monday partially contributed to the uptick in the UK’s FTSE 100 (UK100) index after OPEC+’s decision on Sunday. Burberry (BRBY-L), Ocado (OCDO-L) and Natwest (NWG-L) supported the upside in Footsie despite rising uncertainty surrounding the US elections ahead of upcoming interest rate decisions this week.

Central Bank Actions in Focus

The Fed in the US is broadly expected to cut interest rates by 25 basis points on Thursday, 7 November, with many analysts seeing another similar cut in December. Although policymakers have long signalled a gradual approach to normalisation and recent data on inflation and the labour market support this idea,  future action will probably be affected by who runs the office.

On the one hand, both candidates are still expected to keep increasing the US deficit, which may force the central bank to keep rates high for longer. On the other hand, a Trump win, in particular, may add an extra layer of complexity, given prior calls for interference in the Fed’s decisions and his inflationary policies. However, some economists say that Trump may lean towards rate reductions to counteract his inflationary policies.

Across the pond, the Bank of England (BOE) is also expected to cut interest rates by 25 basis points on Thursday. However, following the new government’s fiscal plans, as announced in its Budget in late October, markets price in at least one rate cut less next year. The chances of a November cut have also been reduced to 80%, with Goldman Sachs (GS) going as far as to predict a hold. (Source: Reuters)

Regardless of the hawkish interpretation of the budget, the UK government will still need to borrow to achieve its budgetary targets, which is one reason the British pound (GBPUSD) came under pressure following the announcement. However, some analysts still point to the eventual pricing in of the Budget rather than expectations around the BOE, though they still expect the bank to be less aggressive going forward.

Conclusion

Amidst a backdrop of increasing political uncertainty, markets are poised for volatility in the coming days. With the US presidential election drawing near and central banks on both sides of the Atlantic preparing for interest rate cuts, investors are bracing for substantial market fluctuations.

 The narrowing polls between Trump and Harris add complexity, calling for cautiousness as analysts continue to weigh the impact of potential policy outcomes on sectors against the broader economic landscape.

With traders trying to navigate stormy waters, the focus remains on key policy decisions until a clear picture emerges from the US elections.