04 November 2024

After months of campaigning, voters will finally go to the US polls on Tuesday to pick the next President of the United States. Whatever the outcome, this election will be historic. 

However, the outcome remains too close to call; the race for glory continues to be closely contested between both Kamala Harris and Donald Trump, with polls failing to pinpoint the outcome as the candidates appear to be almost tied in support. On Sunday evening, Sky News reported that Kamala Harris led Donald Trump by just 0.8 points nationwide at 48.3% of voters versus Trump's 47.5%.

The uncertainty is unsettling markets, and we have seen some risk-off trading with treasuries and stocks being sold off and the US Dollar strengthening, a sign that traders are relying on the traditionally more secure assets to see them through the election. In contrast, however, bitcoin has surged, as those who believe Trump will emerge as the victor place early bets on him deregulating crypto.

It is not the number of votes in favour that will decide the outcome in the US; it is a battle to win the contest across the 50 states. In simple terms, 538 electoral college votes are split across the states, based mainly on population, and the winner will be the candidate that wins 270 or more of these. There are seven key 'battleground' or 'swing' states where neither the Democratic or Republican parties have a stronghold: Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania and Wisconsin, where the focus sits.

The New York Times final pre-election survey showed Harris ahead in four, Trump up in one and a tie in two others; however, once again, the margins were tiny – with the widest margin in Harris' favour only 2.5 %. All eyes are focused in particular on the state of Pennsylvania, with both parties spending more than $350m on their campaigns, ten rallies by Trump and very almost one assassination already to its name; it was also the catalyst for claims of 'electoral fraud' and an uprising on the back of Trump's 2020 defeat by Joe Biden.

At the bookies, however, Trump has accelerated as the favourite candidate to win the election in recent weeks. Highlighting once again that the outcome is uncertain and impossible to call.

The path to this election has been anything but straightforward, with Kamala Harris only being nominated as the democratic candidate on 5th August following public concerns over current President Joe Biden's health and his withdrawal from re-election in late July and Donald Trump literally dodging a bullet in an assassination attempt at a rally in Pennsylvania.

After a recent flurry of strong economic data from the US, it would appear that the next President of the United States will have a big task ahead to maintain this trajectory. Inflation expectations suggest that this will continue to fall, and consumer sentiment continues to improve. The housing market is also showing signs of solid performance, and GDP is only growing slightly below expectations. Despite adding only 12,000 jobs in October, the US jobs market has been performing above expectations in general, and the new President's number one task will be to ensure this economic growth isn't derailed.

Donald Trump is still favoured by markets and investors when it comes to the US economy, and one of his core election promises is to "end inflation and make America affordable again." His plans include expanding US energy production, cutting taxes and extending his tariffs on imports to the US in order to protect domestic trade. A Trump win could be positive for the US Dollar initially on this basis, and it is worth noting that the US Dollar rallied around 5pc on the back of Trump's surprise victory in 2016.

Harris's approach to the economy is arguably softer as she pinpoints an 'opportunity economy' with tax cuts designed to benefit middle – low-income families and extend support to first-time home buyers and parents; this air of continuity could see a more measured reaction around financial markets. The uncertainty of the outcome could cause increased volatility throughout the week as we await results.

With over 74 million US citizens said to have cast their votes already, this election is witnessing a record-breaking voter turnout. The increasing air of anxiety evident during interviews with the US public is a testament to the significance of this election, which remains divisive and will be one to remember – whatever the outcome.

GBP

Despite the huge changes promised by Wednesday's Budget, including £76bn a year in new spending and a near record increase in taxes, the reaction of currency markets was initially controlled. But as the US election approached, we started to see a sell-off in both UK Bonds and the Pound, which are now viewed as a riskier asset class.

At its meeting on Thursday, the Bank of England is expected to cut interest rates for the second time in this cycle, from 5.00% to 4.75%. Such a move appears to be fully priced in to currency market expectations, and the focus will likely move to commentary about future rate cuts. It has been anticipated there will be five cuts to the base rate between now and the end of 2025, but that prediction has now been paired back to four cuts of 0.25%, driven by concerns that cutting too much or too fast could derail the drop in inflation.

The BoE will also release its latest inflation and growth forecasts, which will provide early insight into whether it believes Labour’s budget and new tax and spending plans will stimulate growth in the UK economy.

Wednesday’s release of Construction PMI for the UK will be keenly anticipated after September’s data came in at a two and a half year high, when the index jumped to 57.2 in reaction to renewed vigour in both commercial and home building. 

EUR

The Euro gained some strength last week on the back of higher than expected inflation, which rose to 2% in October from 1.7% in September. The concern that eurozone inflation could rise further in the coming months adds weight to the case for caution in European Central Bank interest rate cuts. The ECB still needs to balance rising inflation with economic growth, and may need to steer away from its current path of interest rate cuts.

A key concern is that inflation in services, which is the biggest single item in the consumer price basket, is rising too quickly at 3.9%. At the same time, wage growth is rising faster than the 3% rate the ECB considers consistent with its target. According to Eurostat data, the labour market also remains tight in September, with the jobless rate holding steady at an all-time low of 6.3%.

This morning, the latest Eurozone Sentix Investor Confidence Index showed a rise to -18.6 in November from -21.9 in October. Meanwhile, the latest GfK Consumer Climate report showed that German consumer confidence in October was at its highest level since April 2022. The Consumer Climate index for November is projected to rise by 2.7 points, bringing it to -18.3 points from a revised -21.0 points in October. 

USD

The USD gained over 4% against the Pound in October, in spite of Friday’s shocking non-farm payrolls release, which revealed that only 12,000 new jobs were created in the private sector in the same month. This is a hugely disappointing drop after the 254,000 bumper number in September. But the unemployment rate remains unchanged at 4.1%, suggesting that the latest figures are only a blip due to adverse weather conditions.

Aside from the hard to miss and hotly contested Presidential election, this week will also see the US Federal Reserve meeting on Thursday, when a further cut of 25bps to interest rates is expected as the FED continue on its path of monetary easing in reaction to America’s falling inflation.

With September’s inflation released at 2.1%, levels are fast approaching the FED’s target of 2%, and it is therefore likely that we will see a further rate cut in the December policy meeting. FED Chair Jerome Powell is expected to avoid politics in the accompanying press conference following the Bank’s announcement, but it is worth noting that if Trump wins there could be a bumpy ride ahead for the Federal Reserve. Trump has made no secret of his desire to challenge its independence.

ISM Services are also due for release this week, and these should provide an opportunity to see whether the service sector continues to perform well as the US economic recovery continues.

This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.