Asia wrap: US election risks dominating Asia trade

Asian equities took a hit for the second consecutive day, mirroring Wall Street's setback after its longest weekly rally of the year. The bond market wasn’t spared either, as cooling hopes for Federal Reserve rate cuts sent Treasuries tumbling. The 10-year yield spiked 11 basis points to 4.20%, further fueled by the so-called "Trump trade," which reignites fears of higher inflation and an escalating trade war. Sensing the storm brewing, investors have flocked to the safety of the US dollar,  and outside of gold, it looks increasingly like the global haven of choice.

The next two weeks are set to be a wild ride. Volatility has surged across stocks, bonds, and currencies as investors brace for a perfect storm of risks: a hotly contested US election, critical interest-rate decisions in both the US and Europe, the looming threat of a wider Middle East conflict, and the ever-present pressure of quarterly earnings.

In the stock market, implied volatility is running way ahead of interday trade ranges and realized volatility, signalling that traders are prepping for turbulence.

To make matters worse, stocks are sitting at record highs, amplifying the background noise of uncertainty. Even though firms are riding the wave of a sturdy U.S. economy and impressive productivity growth, it’s giving investors the perfect excuse to trim risk. With markets already on edge from geopolitical tensions, looming interest-rate decisions, and the unpredictable U.S. election, the slightest wobble could trigger a wave of profit-taking. Investors aren’t just looking at the fundamentals—they're eyeing the door, ready to scale back before the music stops.

The dollar strengthened, U.S. 10-year yields climbed, and risk sentiment took a hit as election risks gripped the markets. U.S. prediction platforms like Polymarket, Kalshi, and PredictIt now show Trump’s implied odds of victory exceeding 60%, with an increased likelihood of a Red Sweep. These developments have impacted U.S. rates, pushing the 10-year yield closer to 4.20% while steepening the yield curve as markets brace for potential policy shifts under a second Trump administration. Though Trump's momentum in swing states has been apparent since September, the overall magnitude of his lead is still clouded with considerable uncertainty. Markets remain on edge, navigating through the fog of election risks and the potential for a sharp shift in economic policy.

Although gold has steadied today, the historically inverse relationship between interest, rates and gold has flipped this year. So, what's fueling the rally? It's all about demand—specifically, a surge from emerging market central banks and Asian retail investors. A big driver here is fear. With geopolitical risks escalating, central banks are concerned about potential sanctions, leading them to stockpile gold instead of dollars and securities. On the retail side, economic uncertainty and worries about currency depreciation are pushing Asian investors towards the safe haven of gold.

These aren't just short-term trends, either. We believe these dynamics will keep a strong bid under gold, providing continued support for its price. So, even if rates remain elevated, we expect bullish momentum in gold to persist as these long-term forces continue to play out.