Election jitters and Fed rate decision set to shake Wall Street this week

Traders gear up for an all-nighter as US elections loom: Wall Street is bracing for a long, volatile night as traders prepare for the results of the US presidential election today, with trading desks in Hong Kong and Singapore ready to support overnight activities. As one portfolio manager put it, “5 November is going to be a blindfolded mud-wrestle in a minefield,” pointing out the uncertainty revolving around the elections this time around.

Everybody is preparing for the big night: Major banks like JPMorgan and Goldman Sachs are staffing up to ensure their trading desks are ready to handle high volumes and volatility throughout the election night. “We will stay as long as we need — if that’s 2 am, it’s 2 am. If we have to sleep over, we will,” said Glen Capelo of Mischler Financial Group.

Focus on bonds and currencies: The ICE BofA Move index — a key measure of expected volatility in the US bond market — surged by 40% last month, while the CME index of implied volatility across major currencies hit its highest level since early 2023.

What happens if who wins? Traders have been putting their money on former president Donald Trump winning for weeks, pushing up stocks, currencies, and crypto, all while bond yields were on the rise. After a poll showed that the Democratic Party’s Kamala Harris has a lead over Trump in Iowa, the Bloomberg USD Index dropped to its lowest since August, yields on 10-year Treasuries fell, and BTC slipped. Traders are eyeing the return of popular “Trump trades” — going long on the USD and short on bonds — with plans to either capitalize on or swiftly unwind these positions, depending on how the results go. But if Harris pulls the rug from under Trump’s feet, Trump trades could reverse, leaving behind dramatic swings in the market overnight.

Lessons from the past: Traders are revisiting the 2016 elections, when markets initially misread the results of the polls, pushing US futures to swing widely. This time, hedge funds are scaling back risks and preparing for any unexpected moves. “Equity markets collapsed after Trump was elected [in 2016], but that lasted a day, then they rallied,” noted Ed Al Hussainy of Columbia Threadneedle Investments. Traders are adopting a neutral stance to shore up their liquidity. “We’ve spent a lot of time cleaning up our inventory and our own positions in order to be as neutral as possible to approach the event from the perspective of providing that intermediation,” Citi’s Vikram Prasad said.

It’s not just the Oval Office that matters, as market reactions also hinge on Congressional outcomes. A Republican sweep could trigger inflation and higher bond yields, as Trump’s plans to cut tax and import tariffs could very much reverse the course on inflation and increase US national debt, while a divided Congress may limit policy shifts, offering some balance.

Ongoing market volatility could extend beyond today, as Wall Street braces for potentially delayed or contested election results. Such scenarios could lead to a prolonged market uncertainty, making it difficult for traders to navigate. There’s also the Federal Reserve’s upcoming rate decision on Thursday, where a second consecutive rate cut is widely expected, with one survey showing that 98% of traders are banking on a 25 bps cut by the end of this week. The Fed’s decision will play a key role in shaping post-election market dynamics, as traders balance election outcomes with potential shifts in monetary policy.

Market reax: It was a sea of red across US markets with the Dow Jones ending the first trading day of the week down 0.6%, the S&P 500 dipping 0.3%, and the Nasdaq falling 0.3%.

The story is all over international press: Bloomberg | FT | CNBC.

MARKETS THIS MORNING-

Asian markets are mixed at dispatch time as investors sit awaiting the results of the US presidential election and the Federal Reserve’s decision when it meets later this week. Japan’s Nikkei is up 1.3% and South Korea’s Kospi is down 0.5%.

THE CLOSING BELL-

The DFM fell 0.8% yesterday on turnover of AED 252.7 mn. The index is up 12.9% YTD.

In the green: Emirates Investment Bank (+15.0%), AL Salam Sudan (+15.0%) and Takaful Emarat (+15.0%).

In the red: National Industries Group Holding (-10.0%), Commercial Bank of Dubai (-5.1%) and Emaar Development (-2.8%).

Over on the ADX, the index fell 0.2% on turnover of AED 1.1 bn. Meanwhile, Nasdaq Dubai closed down 0.9%.