After a fierce and turbulent election campaign, the long-awaited general election has finally arrived, and various macro assets are closely watching (or perhaps overly watching) the latest poll fluctuations, with Polymarkets' Trump's winning rate dropping sharply from 67% to 55%, consistent with other mainstream polls, currently presenting a 50–50 stalemate.
The election focus has slightly diverted the market's attention from the non-farm employment data released last Friday, which was significantly lower than market expectations, with only 12,000 new jobs, far below the expected 100,000. Although recent strikes and hurricanes have partially affected this result, economists believe that the job market will continue to slow down, with unemployment reaching a recent high, and the number of people unemployed for more than 15 weeks will also increase significantly. In addition, private sector employment decreased by 28,000, with significant declines in manufacturing (-46,000) and professional and business services (-47,000). Moreover, the employment data for the previous two months has also been significantly revised downward, with the final figure for August being only +37,000.
Despite the data being significantly lower than expected, the market has not been affected before the US election. Although US Treasury yields initially reacted reflexively to the non-farm employment data, they ultimately reversed and rose, with the yield curve closing up 4-10 basis points, with the 10-year yield approaching 4.40%, and bond traders still hedging the possibility of a Trump victory. In the stock market, although momentum stocks, small-caps, and high-beta stocks performed poorly on the day, the market still rose slightly, while the US dollar strengthened significantly against the British pound (UK budget issues) and the Japanese yen (arbitrage trades).
In terms of interest rate expectations, although the employment data was weak, the market still expects a 25 basis point rate cut this week, followed by another 25 basis point cut, but the specific trend may depend on the final election result.
Returning to the election, as Kamala's support has risen in the final stretch, the polls have almost returned to a stalemate, but the actual market positioning may still lean towards a Trump victory. Compared to the results of most recent elections, the market reaction this time may be two extremes - a Trump victory could drive yields higher, the US dollar stronger, and cryptocurrencies higher, while a Kamala victory would lead to the opposite. However, regardless of who wins, we also believe that the market may have overestimated the short-term impact of the victory, and once the dust settles, the market will undergo a major recalibration and turn its attention to more fundamental themes.
The US Electoral College (EC) system concentrates the decision-making power of the entire US election in 7 swing states, especially Pennsylvania (19 electoral votes), the state with the most electoral votes. According to the latest RealClearPolitics data, Trump is currently leading in 5 swing states, including a narrow lead in Pennsylvania.
Exit polls will start to emerge around 5pm on election day (Wednesday morning Asia time), and voting will end before 10pm Eastern Time. In the 2016 election, each state made official announcements within 1 to 8 hours after the polls closed, but the 2023 election was delayed for days (or even weeks) due to disputes, leading to the subsequent Capitol Hill incident. If the results are delayed, the market may see a risk-averse reaction, especially given the current allegations of election fraud and the extreme polarization of voters.
In any case, as New York and California may experience delays, we expect the presidential election results to be announced earlier than the House of Representatives, and if the Republicans sweep, it will significantly boost the risk markets, but we may have to wait until this weekend to get a clear result.
Trading activity in the coming week will undoubtedly be very busy, with trading volumes in the election day and the following week typically increasing by more than 50-100% in previous elections. Considering that this election is more closely watched and more dramatic than previous ones, we expect trading activity to surge in the short term, just like the unexpected Trump victory in 2016.
Finally, in the cryptocurrency space, BTC was just one step away from its all-time high, but with Trump's winning rate falling, BTC price has dropped below $70,000. According to Coinglass data, BTC failed to break through its all-time high, and over $500 million in long futures positions were liquidated. The peak was within reach, yet still so far away.
Over the past month, the open interest in BTC futures and options has been steadily rising, especially on the Chicago Mercantile Exchange (CME). While the increased mainstream interest in cryptocurrencies has also helped, some of the reason may be that hedge funds are engaging in basis trading against Microstrategy, hedging their BTC futures long positions with short positions in MSTR stock, which has risen over 250% this year, while BTC has risen 65% and Coinbase only 5%. As for why TradFi investors choose this underlying rather than spot ETFs or other mining companies, we currently don't have a clear answer.
To make matters worse, Michael Saylor recently announced a $21 billion new stock issuance to fund the purchase of more BTC, planning to continue buying up to $42 billion worth of BTC over the next 3 years. Although this will result in significant dilution of equity, Microstrategy's stock price has remained stable, while the performance of other cryptocurrency-related stocks has been relatively weak, with Coinbase falling 10% after its earnings report. Perhaps speculating on macro and political outcomes is easier than on a single stock!
Have a good rest, and good luck this week!
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