Asian Stocks Cautious as Election on Knife's Edge: Markets Wrap

Asian equities were set for a mixed day amid increasing risk-off sentiment, as the clock ticked down to a tight US presidential election and the Federal Reserve rate decision.

(Bloomberg) — Asian equities were set for a mixed day amid increasing risk-off sentiment, as the clock ticked down to a tight US presidential election and the Federal Reserve rate decision.

Futures showed stocks in Sydney will ease on Tuesday, while Tokyo’s benchmark may rise more than 1% after reopening following a public holiday. In New York, the Golden Dragon benchmark of US-listed Chinese shares gained 1.1%. The moves came as American companies failed to gain traction on Wall Street, Treasuries rose across the curve and the dollar dropped the most in over a month.

In the run-up to Tuesday’s vote, equity traders decided to stay on the sidelines as a flurry of polls showed Americans remained narrowly split between Donald Trump and Kamala Harris. The likelihood of a disputed result may eventually drag the vote count out for weeks or even months. For many, that means one thing — a potential rise in volatility.

The other positioning challenge is the number of additional catalysts surrounding the vote that are likely to move the market. Election Day will quickly be followed on Thursday by the Fed decision and Jerome Powell’s press conference, where he’ll give details on the central bank’s interest-rate path. And a big chunk of US companies are still due to report their earnings.

“Normally, the Fed rate announcement would dominate the week’s discussion, but this isn’t just any week,” said Chris Larkin at E*Trade from Morgan Stanley. “Traders and investors who have been waiting for the outcome of the election have to prepare themselves for the possibility of a delayed outcome, and the potential impact of that uncertainty on the markets.”

Regarding equity market performance, the S&P 500 tends to see positive returns to close out the year after Election Day, according to Bespoke Investment Group. For all years since 1990, the median gain has been 3.3% with positive returns 25 out of 34 times. For election years, performance has tended to be modestly stronger with a median gain of 3.9% and gains six out of eight times.

Treasury 10-year yields declined ten basis points to 4.28%. The Bloomberg Dollar Spot Index slipped 0.4%. Bitcoin fell 2.6%. Oil climbed after OPEC+ agreed to push back its December production increase and Iran outlined a possible response to Israel’s recent bombardment.

In Asia, attention is on the second day of China’s four-day meeting of the National People’s Congress’ Standing Committee, where the government is widely expected to unveil its latest stimulus package to boost the economy. Beijing’s top legislative body has already reviewed a proposal to transfer some off-balance-sheet debt of local governments to their official accounts, aiming to ease their financial burden.

A key potential ally for Japan’s weakened government, Yuichiro Tamaki, said the central bank shouldn’t raise interest rates again before March, urging it to closely examine the results of next year’s wage deal results before moving on policy again. The yen was steady in early Tuesday trading.

Meanwhile, Australia’s central bank is poised to keep interest rates at a 13-year high, marking a year of unchanged policy as it grapples with a slow pace of disinflation and mounting global risks capped by a tight US election.

Dead Heat

With both US presidential candidates at a “dead heat” heading into next week’s election, markets are bracing for a result that could lead to a wide range of policy outcomes. Yet, it is notable that, since 1933, equities have almost always risen by double-digits by the end of a president’s term, regardless of their party affiliatio, according to Seema Shah at Principal Asset Management.

“Investors should take caution. Those who allow their political opinions to cloud their investing decisions could miss out on the potential rewards that come with staying invested in the market over the long-term,” she noted.

The sustainability of any upward move in equities if Trump wins the election is likely to depend on the magnitude of bond yields’ response, according to JPMorgan strategists led by Mislav Matejka.

A Trump win and a positive market reaction are widely expected at this point, and investors are already long equities “which could lead to travel and arrive at some point,” they said. If Harris wins, the uncertainty over the path of corporate taxes would increase near term. Over the medium term, equities might see some support from the reduced tariffs risk, the strategists noted.

US equity markets performed relatively well during the past month in comparison to steeper declines during the period just ahead of past presidential races. That suggests optimism about the economy and further Fed rate cuts is outweighing worry about the US election, according to strategists at Citigroup Inc.

“Of course, the US election will play a prominent role in moving financial markets around this week,” said Anthony Saglimbene at Ameriprise. “However, a Federal Reserve policy decision on Wednesday, some light economic releases throughout the week, and roughly 20% of the S&P 500 scheduled to report third quarter results should also have their fair share of sway on directing stock traffic.”

Key events this week:

• Australia rate decision, Tuesday
• China Caixin Services PMI, Tuesday
• Indonesia GDP, Tuesday
• Philippines CPI, Tuesday
• South Korea CPI, Tuesday
• US trade, ISM Services index, Tuesday
• US Presidential Election, Tuesday
• Brazil rate decision, Wednesday
• New Zealand unemployment, Wednesday
• Poland rate decision, Wednesday
• Taiwan CPI, Wednesday
• Vietnam CPI, trade, industrial production, Wednesday
• ECB President Christine Lagarde speaks, Wednesday
• China trade, forex reserves, Thursday
• Eurozone retail sales, Thursday
• Mexico CPI, Thursday
• Norway rate decision, Thursday
• Peru rate decision, Thursday
• Sweden rate decision, CPI, Thursday
• UK BOE rate decision, Thursday
• US Fed rate decision, initial jobless claims, productivity, Thursday
• Brazil inflation, Friday
• Canada employment, Friday
• Chile CPI, Friday
• Taiwan trade, Friday
• US University of Michigan consumer sentiment, Friday
• Fed Governor Michelle Bowman speaks, Friday

Some of the main moves in markets:

Stocks

• Hang Seng futures were little changed as of 7:40 a.m. Tokyo time
• S&P/ASX 200 futures fell 0.4%

Currencies

• The Bloomberg Dollar Spot Index fell 0.4%
• The euro was little changed at $1.0879
• The Japanese yen was unchanged at 152.13 per dollar
• The offshore yuan was little changed at 7.1111 per dollar
• The Australian dollar was unchanged at $0.6585

Cryptocurrencies

• Bitcoin rose 1% to $67,731.35
• Ether rose 1% to $2,394.04

Bonds

• Australia’s 10-year yield was little changed at 4.56%

Commodities

• Spot gold was little changed

This story was produced with the assistance of Bloomberg Automation.