Stocks, bonds and gold could collapse if uncertainty surrounding US elections persists

• Stocks and bonds could collapse due to uncertainty surrounding the outcome of the US election.
• The Fed will cut rates again, but markets will likely focus on its guidance.
• Dovish comments from the RBA and BOE could boost the US dollar.

A now-familiar dynamic weighed on Wall Street last week as interest rates continued to rise. Rates on 2- and 10-year Treasury bills rose in parallel, with a little more action on the long end leading to a slight steepening of the yield curve. The benchmark S&P 500 lost 1.5% while the tech-leaning Nasdaq 100 lost 1.7%.

Gold prices and the US dollar changed little in this context. The yellow metal edged down from record highs, down 0.2%. The greenback diverged against its major peers, falling against the euro but gaining ground against the pound sterling and commodity currencies the Australian and Canadian dollars.

In this context, these macroeconomic orientations will probably determine the course of events.

U.S. Election Uncertainty Could Cause Stocks, Bonds to Fall Simultaneously

The US presidential election is an obvious focal point on this week’s calendar. National opinion polls result in a tie, according to data from Real Clear Politics. Betting markets swung to a similar conclusion last week, after favoring Republican Donald Trump over Democrat Kamala Harris.

For traders, it seems more practical to focus on the outcome in the form of binary event risk rather than through the prism of possible governance style and political outlook. Overall, the degree of post-election uncertainty will likely determine price action. Stocks could be affected by rising yields if the outcome is uncertain or contested in the 24 to 48 hours after the election closes.

Will the Federal Reserve adopt strong US economic data?

Markets are overwhelmingly leaning in favor of a 25 basis point (bps) interest rate cut from the Federal Reserve. The probability of another such move in December stands at 81.7%, implying that traders expect the US central bank to respect the forecasts revealed in September.

This likely means that markets perceive some degree of “autopilot” at play until the calendar turns to 2025. Nonetheless, traders will be keen to assess how the central bank is framing US economic data more hotter than expected proposed since the Federal Interest Rate Setting Committee (FOMC) met six weeks ago.

For their part, markets saw the upbeat results as evidence of upward pressure on inflation, driving Treasury yields and the U.S. dollar higher in anticipation of a hawkish adjustment that would limit the trajectory. rate reduction next year. 73 basis points are now incorporated into prices, a total reduction less than what Fed officials expected.

Dovish guidance from the RBA and BOE could boost the US dollar

The US dollar could advance as central banks in Australia and the UK lean towards the dovish end of the spectrum with their policy updates this week. The Reserve Bank of Australia (RBA) is expected to maintain its target interest rate at 4.35%, while the Bank of England (BOE) is expected to cut it by 25 basis points to 4.75%.

Both of these outcomes are heavily weighted and therefore may not have much to offer in terms of directional inspiration for the markets. The disappointing growth dynamics of the two economies since the middle of the year could, however, encourage policy makers to adopt a more accommodating posture in official comments. This could hurt the Australian dollar and the British pound.

Ilya Spivak, tastylive, Head of Global Macro, has 15 years of trading strategy experience and specializes in identifying thematic movements in currencies, commodities, interest rates and stocks. It hosts Macro money and co-hosts Over time, Monday-Thursday. @Ilyaspivak

For daily live programming, market news and commentaryvisit tastylive or YouTube channels tastylive (for options traders), and tastyliveTrends for stocks, futures, forex and macro.

Trade with a better broker, open a tasty account Today. savorylive, Inc. and savorytrade, Inc. are separate but affiliated companies.