US election jitters suck the air out of the room, mega cap earnings miss the mark - A late innings Oil shocker

OIL prices surged over $1 after settlement on reports that Iran may be preparing a retaliatory strike against Israel. 

Markets

Stocks took a nosedive as cautious outlooks from tech titans Microsoft and Meta raised doubts that this year’s impressive 45% surge in AI-driven megacaps can keep climbing. These tech behemoths, beloved and bolstered by their AI promises, now face scrutiny over whether their massive bets on artificial intelligence will yield the returns investors are counting on. But it’s not just the tech giants feeling the squeeze; global markets are on edge, too, with U.S. election jitters sucking the air out of the room. The looming election adds a heaping dose of uncertainty, and while betting markets have lately tipped toward a Trump win and even a GOP sweep, polling still shows Trump’s lead is razor-thin and within the margin of error.

Treasuries managed a modest boost on Thursday amid a stock market retreat, but they’re still en route to their biggest monthly selloff in two years. Investors seem convinced the Fed might slow down on rate cuts with the economy still firing on all cylinders.

Adding to the global market jitters, oil futures surged over $1 after the close on reports that Iran may be gearing up for a retaliatory strike against Israel. The potential for escalating conflict has reignited fears around oil supply disruptions in the already volatile Middle East. This latest development compounds broader market uncertainties, where geopolitical tensions, inflation worries, and impending U.S. election risks are already weighing heavily on sentiment.

Forex markets

USD/JPY remains pressured after Bank of Japan Governor Kazuo Ueda surprised markets with a hint that the BoJ could consider rate hikes if its economic outlook holds. This caught traders off guard, especially since the BoJ was widely expected to tilt dovish amidst Japan’s ongoing political limbo.

While Ueda’s remarks weren’t exactly earth-shattering, his explanation for the BoJ’s new “We can afford some time” phrasing turned heads. He noted that since August, this line reflects a shift driven by softer-than-expected U.S. jobs data, which has rippled through markets and impacted Japan’s economic trajectory. Hence, the recent wave of more robust US economic data could put the BoJ on course with a rate hike in December.

On the dollar front, its recent rally has been tied to expectations of a Trump win and widening U.S. rate spreads, as other central banks appeared poised to stay dovish. However, with both the ECB and BoJ now signalling less dovishness than markets had priced in, the dollar’s upside might be limited in the near term. This sets the stage for a potential pullback—especially if today’s U.S. payrolls report comes in softer as pre-event positioning hints at.

Meanwhile, across the Atlantic, UK assets tumbled in a swift reaction to the new Labour government’s enthusiastic embrace of high borrowing—dragging British bonds, stocks, and the pound lower as inflation fears took center stage. It is also supporting the yen from a “ safe haven” perspective, with GBPJPY down over 1.5 %

Oil Markets

Already bolstered by stronger U.S. fuel demand, the possibility of an OPEC+ supply hike delay, and a positive uptick in China’s manufacturing activity, oil prices surged over $1 after settlement on reports that Iran may be preparing a retaliatory strike against Israel. The combined factors have reignited momentum in the oil market, as geopolitical tension adds a fresh layer of risk to already buoyant demand signals. Traders are now closely watching for any official updates, with these forces likely to keep prices elevated amid heightened volatility.

Higher oil prices due to Middle East escalation tend to favour the US dollar in the FX markets.

Middle East powder keg

Israeli intelligence suggests that Iran may be planning a significant attack on Israel from Iraqi territory, potentially within days and possibly timed just ahead of the U.S. presidential election. Sources familiar with the intelligence told media sources that Iran might mobilize pro-Iranian militias based in Iraq to launch a large-scale assault, involving drones and ballistic missiles. This approach would allow Iran to deliver a powerful blow while avoiding direct involvement that could lead to Israeli reprisals against targets within its own borders.

The potential escalation follows weeks of tit-for-tat exchanges between Israel and Iran, and the decision to use Iraqi territory may signal Tehran’s intent to complicate Israel’s retaliation options. Markets are watching closely, as a move of this scale would almost certainly inject fresh uncertainty across global asset classes. With geopolitical tensions already high, this looming risk has the potential to impact everything from safe-haven flows to energy prices, especially given oil’s recent rally.

Iran’s leadership has been vocal in recent days, ramping up rhetoric in response to last week’s Israeli airstrikes. Iranian Revolutionary Guard Corps commander Hossein Salami called Israel’s attack a “mistake” and warned that Iran’s response would be “unlike anything Israel might expect.” Meanwhile, sources within Iran told CNN that Tehran’s retaliation would be “definitive and painful,” with strong indications it could occur before the U.S. election.

The timing couldn’t be more critical. Markets have been edgy in the lead-up to the election, and an escalated conflict in the Middle East would amplify volatility just as investors seek clarity on U.S. policy direction. As energy prices, bond yields, and safe-haven assets are already reacting to these geopolitical undercurrents, a decisive Iranian move could push volatility into overdrive, creating a challenging environment for risk assets and positioning investors for yet another test of market resilience.

Trump 2.0

Last time, Trump’s win sparked a surge in yields that quickly leveled off. This year, it seems like the bond market has tried to front-run the Election Day spike in yields, with rates already reaching levels that took months to hit back in 2016. But in 2024, there’s much less leeway: we’ve recently seen yields touch 5%, and another post-election rise could strain markets far more than before.

The prolonged stock rally that followed Trump’s first victory also seems less likely this time around. Higher rates and loftier valuations mean stocks are starting from a more stretched position; back then, the S&P 500 traded around 1.8 times sales—today, it’s over three. Stocks could still rally, but those starting conditions suggest a lower ceiling.

The difference in rate levels also shows up in smaller companies' performance. In 2016, small caps led the charge, outperforming much of the year and soaring post-election. This time, they’ve been under pressure for years, and while midsummer saw a flicker of outperformance, that momentum has faded. Smaller companies don’t seem to be feeling the same Trump-fueled optimism.

All in all, while 2016’s "Trump trade" drove a wave of market enthusiasm, the setup in 2024 is far more constrained, with rates near record highs and valuations pushed to the limit. The excitement just doesn’t seem to be trickling down as broadly this time around.

European risks

The risks Europe faces from a potential second Trump presidency are even starker than in 2016, given the region’s current landscape of fragile growth, enduring manufacturing challenges, and an increasingly unpredictable geopolitical backdrop. Europe’s open, export-reliant economy could be especially vulnerable to any new wave of global protectionism. While a proposed 10% across-the-board U.S. tariff might appear manageable at first glance, the heightened uncertainty it brings would likely cast a shadow over business sentiment, triggering a cascade of second-order economic effects.

Germany, Europe’s manufacturing powerhouse, could find itself at a critical tipping point. Many German manufacturers have managed to avoid layoffs despite persistent weak demand, but a new era of U.S. protectionism could leave them with few alternatives. An aggressive trade stance from Washington could severely impact Europe’s industrial core, compounding economic vulnerabilities and pressing policymakers across the continent to recalibrate their strategies.

ASEAN risks

ASEAN economies have shown impressive resilience, buoyed by strong exports and steady investment flows. However, the 2025 outlook hinges squarely on the outcome of the U.S. presidential election. A bright forecast for the region banks on a Kamala Harris victory, which could mean stability in trade tariffs. If Harris prevails, markets may swiftly unwind “Trump trades,” turning their focus back to the tailwind effects of U.S. rate cuts, likely benefiting ASEAN’s growth trajectory, bond markets, and local currencies.

Conversely, a Trump win could darken ASEAN’s horizon considerably. Sharp U.S. tariff hikes on Chinese imports would likely curb Chinese demand and shake business confidence. With ASEAN’s economy closely intertwined with China, the resulting ripple effects could weigh heavily on trade, investment, and overall sentiment across the region. Local currencies could face significant downside if Trump’s trade policies take hold, threatening to unsettle ASEAN markets just as they’ve found solid footing.