FX market prices in US election risks, as stocks focus on earnings

Risk sentiment is higher on Thursday as earnings data and retreating bond yields lift equities. US and European yields are falling on Thursday; however, the UK is bucking this trend and 10-year, and 2-year yields are both higher. The market may be reluctant to buy UK bonds until we get past next week’s Budget. Tesla reported a positive earnings surprise on Wednesday night, and it’s share price is higher by more than 10% in the pre-market. This has boosted the market mood after three days of losses, and US S&P 500 futures are predicting a stronger open, that could push the index close to its record high from last week.

Treasury yields and the US election result  

The decline in bond yields is not down to any fundamental factor or change in the economic backdrop. Instead, the market has reduced bets that the Fed will not cut rates when it meets next month. There had been a 12% chance of no change at the Fed’s next meeting, according to the CME Fedwatch tool, however, that has fallen to 7%. The polls ahead of the US Presidential election have continued to narrow. RealClearPolitics’ poll average predicts that Harris will win 48.8% of the vote, while Trump will win 48.6%. This election is too close to call, and the prospect of no clear winner cannot be ruled out. The market may be pricing in a higher chance of a rate cut from the Fed in November, partly because no clear outcome from this election could hit economic sentiment and weigh on economic growth, forcing the Fed into more rate cuts. The narrowing of the election polls could also be weighing on the dollar. A strong dollar was part of the Trump Trade, which has dominated markets in recent weeks. If the polls are too close to call, then it is natural that a trade that backs a certain candidate would be cut back.

UK PMI suggests Budget is weighing on business

Overall, we think that the decline in US bond yields, and the weakness in the dollar is a pause, rather than a change in the overall trend. EUR/USD is back above $1.08 on Thursday, and GBP/USD has bounced back above $1.29, as the dollar weakens. The European and UK PMI data was not spectacular, and the UK composite PMI fell to its lowest level since November 2023. However, the German PMIs picked up slightly, including the manufacturing reading, which suggests that the Germany economy may be past the worst.

The UK’s PMI report for October was impacted by delayed decision making by clients due to economic uncertainty. Thus, if Rachel Reeves does not scare the horses with her Budget next week, we could see growth pick up at the end of the year. The rate of inflation eased to its lowest level for 47 months, although companies noted higher cost burdens according to S&P Global who produce the report. Although energy costs have retreated further this month, the cost of wages have increased, and this may also have weighed on sentiment.

The latest PMI data suggests that the UK economy struggled at the start of Q4, however, the pound appears to be resilient to today’s PMI reports. The FX market may not express a directional bias until the budget passes, and we can assess growth and sentiment after the tax changes that are expected. The FX market could be in wait-and-see mode until the two big political events: the UK budget and the US Presidential election, pass. Stock markets seem immune to these risks, as they concentrate on earnings data. So far, earnings on both sides of the Atlantic have been positive, with Barclays beating earnings estimates, and proving that its turnaround strategy is working. Investors are rewarding companies that are beating earnings estimates, Tesla’s share price is expected to open higher by 10% later today, and Barclays share price is higher by 3.8%.