Shifting Tides: How Election Odds and Economic Indicators Reshape the Global Landscape
The recent presidential debate between former President Donald Trump and current Vice President Kamala Harris has sent ripples through the global markets, with the dollar and US equities experiencing a decline in the aftermath. As the election odds continue to shift, the implications for the economy and financial markets are becoming increasingly complex. This article delves into the key factors driving these changes and the potential impact on the broader economic landscape.Navigating the Shifting Political Landscape
The Debate's Impact on Voting Intentions and Market Sentiment
The highly anticipated presidential debate in Philadelphia left many open questions regarding policy, as both candidates agreed to hold another debate before the November 5th election. Interestingly, the endorsement of Kamala Harris by Taylor Swift appears to have had a more significant impact on voting intentions than the debate itself. This sentiment is reflected in the markets, with betting markets now showing a slight bias towards Harris winning the election, leading to a decline in the dollar and US equities.The Implications of a Harris Presidency
The markets currently view a Trump presidency as more favorable for both the dollar and US equities, given his stance on lowering taxes and introducing additional tariffs. In contrast, a Harris victory is seen as less positive for these assets, as her policies may be perceived as less business-friendly. This shift in market expectations has contributed to the recent decline in the dollar and US equities.The Potential for Policy Shifts
The changing election odds have also influenced expectations around monetary policy. Fed futures are now favoring a 25 basis point cut next week, with the chance of a more aggressive 50 basis point cut rising slightly. The highly anticipated CPI report due today could further alter these probabilities, as investors seek to interpret the data in light of the evolving political landscape.The Yen's Surge and the Bank of Japan's Hawkish Stance
Amidst these developments, the Japanese yen has been tearing through the FX markets, appreciating against 98% of the world's currencies since the beginning of the second half of 2024. This is partly driven by the Bank of Japan's hawkish bias, which has fueled expectations of a potential rate hike before the end of the year. The combination of US yields falling to 17-month lows and the expected policy normalization in Japan has contributed to the yen's strength.The Pound's Reaction to Stagnating Growth
The UK economy stagnated in July, missing market expectations across all key sectors. This has led to expectations of lower interest rates, with some bets on rate cuts being added into the OIS curve. However, the Bank of England is expected to remain the most hawkish among the G3 central banks, refraining from cutting policy rates in next week's decision. The pound initially shrugged off the weaker data, buoyed by a boost from US election polls, but eventually surrendered its early gains.The Euro's Resilience Amid Domestic and Global Developments
The euro received an early morning boost on the back of the US presidential debate, having previously fallen to a 3-week low. European equities pulled back, while bonds remained in demand, with the two-year Bund yield falling to a more than seven-month low. Domestically, the final German CPI for August matched preliminary readings, while the announcement of Volkswagen's decision to scrap its three-decade-old German jobs guarantee signaled the challenges facing Europe's largest economy.The Canadian Dollar's Gains Ahead of the US CPI Release
The Canadian dollar has gained ground in the lead-up to the highly anticipated US CPI release, as investors position themselves for the potential market impact of the data. The global risk events and economic indicators continue to shape the currency markets, with the Canadian dollar's performance reflecting the broader shifts in the global landscape.
