SignalPlus Macro Analysis: It is expected that only a 25 basis point rate cut will occur this week; short-term trading activity is set to surge

2024-11-05 15:19

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Original title: "SignalPlus Macro Analysis Special Edition: Final Election Preview"

Original source: SignalPlus

After an intense and turbulent campaign, the long-awaited election has finally arrived. Various macro assets are paying close attention (perhaps overly concerned) to the final poll fluctuations. Among them, Polymarkets' Trump's chance of winning has dropped sharply from 67% to 55%, consistent with other mainstream polls, and is currently in a 50-50 stalemate.

The election focus slightly distracted the market from the non-farm payrolls data last Friday, which was significantly lower than market expectations, with only 12,000 new jobs, far lower than the expected 100,000. Although the recent strikes and hurricanes have partially affected this result, economists believe that the job market will continue to slow down, the number of unemployed people will rise to a recent high, and the number of people who have been unemployed for more than 15 weeks will also increase significantly. In addition, private sector employment decreased by 28,000, with manufacturing (-46,000) and professional and business services (-47,000) falling sharply. In addition, the new employment data for the previous two months were also significantly lowered, and the final data for August was only +37,000.

Although the data was significantly lower than expected, the market was not affected before the US election. US Treasury yields had a knee-jerk reaction to the non-farm payrolls data, but eventually reversed and rose, with the yield curve closing 4–10 bps higher, with the 10-year yield close to 4.40%, as bond traders continue to hedge against the possibility of a Trump win. In the stock market, stocks rose slightly despite the poor performance of momentum stocks, small-cap stocks and high-beta stocks on the day, while the dollar strengthened significantly against the British pound (UK budget issues) and the Japanese yen (carry trade).

In terms of interest rate expectations, despite the weak employment data, the market still expects only a 25bp cut this week and a further 25bp cut thereafter, but the exact direction may depend on the final election results.

Back to the election, with Kamala's support rising at the last minute, the polls have almost returned to a tie, but the actual market position may still be inclined to Trump's victory. Compared to most recent election results, the market reaction this time is likely to be at two extremes, with a Trump victory likely to drive higher yields, a stronger dollar, and higher cryptocurrencies, 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 do a lot of 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), which has the most electoral votes. According to the latest situation of RealClearPolitics, Trump is currently leading in 5 swing states, including a narrow lead in Pennsylvania.

Exit polls will appear at 5 pm (Wednesday morning Asia time) on Election Day. Voting will end before 10 pm EST. In the 2016 election, the states made official announcements within 1 to 8 hours after the end. However, the 2023 election was delayed for days (even weeks) due to disputes, leading to the subsequent Capitol Hill incident. If the results are delayed, the market may react with risk aversion, especially considering the current allegations of election fraud and the extreme polarization of the electorate.

In any case, we expect the presidential election results to be known earlier than the House results due to possible delays in New York and California, which would provide a significant boost to risk markets if the Republicans win big, but we may have to wait until the end of this week to get a clear result.

The coming week will undoubtedly be very busy, with previous elections seeing 50–100%+ increases in trading volume on election day and the week after, and given that this election is more closely watched and more dramatic than previous ones, we expect a surge in trading activity in the short term, similar to the surprise Trump win in 2016.

Finally, in crypto, BTC was just one step away from its all-time high, but as Trump's victory rate fell, BTC prices also fell below $70,000. According to Coinglass, BTC failed to break through the all-time high, and more than $500 million in futures long positions were liquidated. The high is so close, but it is so far away.

Open interest in BTC futures and options has been steadily climbing over the past month, especially on the Chicago Mercantile Exchange (CME). While mainstream interest in cryptocurrencies has also helped, some of the reason may be hedge funds’ basis trades on Microstrategy, where hedge funds may have made basis trades between long BTC futures and short MSTR stock, which is up more than 250% this year, while BTC is up 65% and Coinbase is up only 5%. As for why TradFi investors chose this target instead of spot ETFs or other mining companies, we don’t have a clear answer at this time.

To make matters worse, Michael Saylor recently announced a $21 billion new share offering to fund the purchase of more BTC, with plans to continue purchasing up to $42 billion in BTC over the next 3 years. Despite the significant dilution of equity, Microstrategy's stock price has remained stable, while other cryptocurrencies have performed relatively weakly, with Coinbase falling 10% after the earnings report. Perhaps it's easier to speculate on macro and political outcomes than on individual stocks!

Rest well and have a good week!