SignalPlus Macro Analysis Special Edition: Final Election Preview
After a fierce and tumultuous campaign, the long-awaited election has finally arrived, with various macro assets closely monitoring (perhaps overly so) the final polling fluctuations. The probability of Trump winning on Polymarkets has dropped significantly from 67% to 55%, aligning with other mainstream polls, currently showing a deadlock at 50-50.
The focus on the election has slightly diverted the market's attention from last Friday's non-farm payroll data, which came in significantly below market expectations, with only 12,000 jobs added, far below the expected 100,000. Although recent strikes and hurricanes partially affected this result, economists believe the job market will continue to slow, with unemployment reaching a recent high and the number of those unemployed for over 15 weeks also increasing significantly. Additionally, private sector employment decreased by 28,000, with substantial declines in manufacturing (-46,000) and professional and business services (-47,000). Furthermore, the job additions for the previous two months were also significantly revised down, with the final data for August showing only +37,000 jobs.
Despite the data being significantly below expectations, the market has not been affected ahead of the U.S. election. U.S. Treasury yields initially reacted instinctively to the non-farm payroll data but ultimately reversed and rose, with the yield curve closing up 4-10 basis points, and the 10-year yield approaching 4.40%. Bond traders are still hedging against the possibility of a Trump victory. In the stock market, despite poor performance from momentum stocks, small caps, and high beta stocks that day, the market still saw a slight increase, while the dollar strengthened significantly against the pound (due to U.K. budget issues) and the yen (due to arbitrage trading).
In terms of interest rate expectations, although the employment data is weak, the market still anticipates only a 25 basis point rate cut this week, followed by continued 25 basis point cuts, though the specific trajectory may depend on the final election results.
Returning to the election, as Kamala's support rises at the last moment, the polls have nearly returned to a competitive state, although actual market positions may still lean towards a Trump victory. Compared to most recent election outcomes, the market reaction this time may be two extremes: a Trump victory could drive yields up, strengthen the dollar, and boost cryptocurrencies, while a Kamala victory would lead to the opposite result. However, regardless of who wins, we believe the market may be overestimating the short-term impact of the victory, and once the dust settles, the market will undergo significant recalibration and shift its focus back to more fundamental themes.
The U.S. Electoral College (EC) system concentrates the decision-making power of the entire U.S. election in seven swing states, particularly Pennsylvania (19 electoral votes), which has the most electoral votes. According to the latest from RealClearPolitics, Trump is currently leading in five swing states, including a narrow lead in Pennsylvania.
On election day, exit polls will start to emerge at 5 PM (Wednesday morning Asia time), with voting ending by 10 PM Eastern Time. In the 2016 election, states made official announcements within 1 to 8 hours after voting ended. However, the 2023 election has been delayed by several days (even weeks) due to controversies, leading to subsequent events on Capitol Hill. If results are delayed, the market may react with risk aversion, especially considering the current allegations of election fraud and extreme polarization among voters.
In any case, due to potential delays in New York and California, we expect the presidential election results to be announced earlier than those for the House of Representatives. If the Republican Party wins significantly, it would greatly boost risk markets, but we may have to wait until this weekend for a clear result.
The trading activity in the coming week will undoubtedly be very busy, as previous elections saw trading volumes increase by over 50-100% on election day and the following week. Given that this election is receiving more attention and is more dramatic than previous ones, we expect a surge in trading activity in the short term, similar to Trump's unexpected victory in 2016.
Finally, in the cryptocurrency space, BTC was originally just a step away from its historical high; however, as Trump's winning probability declined, BTC's price also fell below $70,000. According to Coinglass data, BTC failed to break through its historical high, with over $500 million in futures long positions being liquidated. The peak was so close yet so far.
Over the past month, the open interest in BTC futures and options has been steadily rising, particularly on the Chicago Mercantile Exchange (CME). While increased mainstream interest in cryptocurrencies has helped, part of the reason may be hedge funds engaging in basis trading with Microstrategy. Hedge funds may be trading the basis between long BTC futures and short MSTR stock, with MSTR's stock price rising over 250% this year, while BTC has increased by 65%, and Coinbase has only risen by 5%. As for why TradFi investors are choosing this asset instead of a spot ETF or other mining companies, we currently do not have a clear answer.
To make matters worse, Michael Saylor recently announced a new stock issuance of $21 billion to fund the purchase of more BTC, planning to continue buying up to $42 billion worth of BTC over the next three years. Although this move will cause significant dilution of equity, Microstrategy's stock price remains stable, while the performance of other cryptocurrency assets has been relatively weak, with Coinbase dropping 10% after its earnings report. Perhaps speculating on macro and political outcomes is easier than on a single stock!
Take a good rest, and wish you good luck this week!
