US polls spur position adjusting ahead of tomorrow's election

Overview: Weekend polls in the US made it seem that the Trump victory, which many large pools of capital, had discounted, was not so inevitable after all. The most dramatic market response was taking US yields and the dollar lower. The US 10-year yield is off about nine basis points to straddle 4.30% and the two-year yield down four basis points to around 4.16%. The greenback is also against all the G10 currencies. Most emerging market currencies are also firmer, led by central Europe and the Mexican peso. 

Equities are mostly higher. Tokyo markets were closed for a national holiday but most of the large markets in Asia Pacific rose, with the exception of India. The MSCI Asia Pacific Index has fallen for the past five weeks. Europe's Stoxx 600 is trying to snap a two-week decline, and it is posting its first back-to-back gain in more than two weeks. US index futures also enjoy a firmer tone. European benchmark 10-year yields ae mostly 1-2 bp firmer, but Italian and Spanish bond have caught a bid, and yields are a little softer. On the other hand, Gilt yields are continuing to rise since the budget. The yield was near 4.20% before the budget and poked above 4.50%. It is now near 4.47%. Gold slipped closer to $2730 today (~$2736.70 settlement) before steadying. It is trading quietly near $2740 now. Iran's threat to strike back at Israel and OPEC+ decision to postpone production increases for the second time is lending support to December WTI. It is trading firmly near last week's high above $71. 

Asia Pacific

China's Caixin service and composite PMI will be reported before the markets opened tomorrow. A small rise in the official service PMI (50.5 vs. 50.3) and the increase in the manufacturing PMI, reported before the weekend (49.7 vs 49.3) led to stronger composite reading (50.6 vs 50.3). The focus is not so much on this week's politically sensitive trade report, but the initiatives coming from this week's National People's Congress session. The market will be disappointed if there is not a significant fiscal package. We think China is best served if it is funded by the central government not the local governments. Japan sees the final October service and composite PMI Wednesday, but investors and officials may be more interesting the labor earnings and household spending figures on Thursday. Australia sees its final PMI and trade figures, but the highlight is the central bank meeting tomorrow. The RBA will not do anything even after the softer Q3 CPI. But the market does not have the first cut discounted until next May, which seems a bit too long of a wait.

The US 10-year yield rose to new four-month highs as participants looked past the jobs data, and the US dollar recovered from the week's low (~JPY151.80) to a new session high, slightly above JPY153. The dollar has risen in eight of the past 10 sessions, and although Japanese officials have been unusually quiet, the greenback was pulled lower by the decline in US 10-year yields and the unwinding some of the election-inspired gains. The US 10-year yield that approached 4.4% before the weekend is near 4.30% now. The dollar was sold to JPY151.60, around where the 200-day moving average is found. A break of it could signal a move to JPY150.00. The Australian dollar has a five-week losing streak in tow, it matches the longest decline since August 2023. Yet, in recent days, the downward momentum has stalled, and the Aussie has been in about a third of a cent range centered near $0.6560. It peaked ahead of the weekend at the upper end of the range and stopped short of $0.6600, where options for nearly A$1.5 bln expire today. The Aussie traded to a five-day high near $0.6620 before stalling. It pulled back to around $0.6585 before finding a bid in the European morning. The dollar was virtually flat against the offshore yuan last week and it snapped a three-month decline in October. It frayed the upper end of its recent range early last week, rising to a two-and-a-half-month high near CNH7.1640 before pulling back to near a two-week low before the weekend (~CNH7.1145). The yen's gains and decline in US rates saw the greenback slide to CNH7.0870 today, a three-week low. It is near CNH7.10 in European turnover. The PBOC set the dollar's reference rate at CNY7.1203 (CNY7.1135 before the weekend).

Europe

With three west European central bank meetings this week, and the US election and FOMC meeting, the eurozone is not center stage. Earlier today, the final October manufacturing PMI was released. It ticked up to 46.0 from the initial estimate of 45.9. It is the first monthly increase since May, and it has not been above 50 since June 2022. The flash estimate for Germany was revised higher (43.0 vs. 42.6 flash and 40.6 September), while France was final reading was steady (at 44.5 vs.44.6 September). The new news was with Spain (54.5 vs.53.0) and Italy (46.9 vs. 48.3). Three central banks meet on Thursday, several hours before the FOMC meeting concludes. In the face of three contracting quarters and softening inflation, Sweden's Riksbank is likely to deliver a half-point cut. The Bank of England is widely expected to deliver a quarter-point cut, while Norway's Norges Bank sits tight. In central Europe, Poland's central bank meets Wednesday. It cut rates by 100 bp last year but has stood pat this year. No change is expected. The Czech central bank meets November 7. It has cut rates at every meeting beginning last December. Another quarter-point cut is anticipated. 

The euro's price action was poor ahead of the weekend. It initially pushed above $1.09, for the first time since mid-October on the weak jobs’ growth, but the euro reversed lower and took out Thursday's low (~$1.0845). It held $1.0845 today and reached a higher in the Asia Pacific turnover near $1.0905 and revisited it Europe. Since the high was recorded, the euro has been confined to a narrow range and has not been below $1.0885. After selling off sharply in response to the budget and seeing its lowest level in two-and-a-half months (~$1.2845), sterling stabilized ahead of the weekend. While the euro was posting an outside day, sterling was recording an inside day. Sterling reached a three-day high today but continued to be capped at $1.30. There are GBP800 mln options struck there that expire today. Meanwhile, the sell-off in UK Gilts, post-budget, continues. 

America

Tomorrow's US election dominates conversations today. The polls point to an extremely tight contest, but some polls suggest Harris may have some last-minute momentum. Higher turnover is thought to be a positive for Harris. Moreover, many appear to be bracing for a protracted count/verification process. The other highlight this week is the FOMC meeting. The market expects the Federal Reserve to look past the solid Q3 GDP (2.8%) and the distorted October jobs report. If the Fed wanted to protest the market's confidence of a quarter-point cut this week (95%+), it would have found a way, as it did in September to put the half-point cut back on the table. Judging by the Fed funds pricing, the market became slightly more confident of quarter-point cut in December as well (~80% vs. 70% a week ago).

The Canadian dollar was sold to new two-year lows ahead of the weekend. The US dollar approached CAD1.3950. There is little standing in the way of CAD1.40, which holds options for $1.35 bln that expire today. Since the end of August, the US two-year premium over Canada has widened from less than 60 bp to more than 110 bp, the most since 1997. The greenback last traded above CAD1.40 in May 2020. In today's pullback the US dollar saw almost CAD1.3890 but is back near CAD1.3920 in European turnover. The greenback slipped to nearly MXN19.92, the low for the week before the US jobs data, and surged to almost MXN20.30, posting an outside up day before the weekend. However, with the unwinding of some of the election play, the dollar was sold to about MXN20.07 in Asia Pacific and has consolidated mostly below MXN20.15. Support is seen in the MXN20.00-MXN20.05 area today.