A Look at the Day Ahead in U.S. and Global Markets from Mike Dolan

Even with the uncertainty of what most pollsters see as a dead heat in the White House race, world markets are in an upbeat mood as Americans cast their ballots on Tuesday and await the results.

One reason for the relative calm is that bookmaker odds on a Republican "clean sweep" of the presidency and both houses of Congress have lengthened compared to last week, with gridlock now the best guess whoever wins the presidency.

That takes some of the edge off fiscal policy worries, even if trade tariff calculations remain in the mix since the president can pursue them independently.

Another prosaic reason is that stock markets tend to rally once the anxiety of the waiting passes.

Moreover, there is also the small matter of a second Federal Reserve interest rate cut of the year on Thursday, which is likely to follow either way.

Although in edgier pandemic times, the VIX "fear index" of U.S. stock volatility was about 15 points higher than it is now on the eve of the last tight election in 2020, and it fell more than 10 points within a week of the contested results.

At less than 22 on Tuesday, the VIX is almost half its highest close during the yen-related blowout this August, and December VIX futures are four points lower.

The real volatility this time around is in bond markets, where the Treasury MOVE index is more than twice what it was in 2020—at its highest for a year.

That said, Treasury yields held steady into the vote at 4.3%, and Wall Street stock index futures were steady to firmer too.

Many of the recently buoyant "Trump trades" backing a win for the Republican candidate—betting on a higher dollar, Bitcoin, and a weaker Mexican peso and Chinese yuan—remained on the back foot as prediction markets on the outcome are now basically 50-50. However, these steadied somewhat after Monday's recoil in NASDAQ.

While some of the results will start streaming in overnight, it could take days for the outcome to be clear, given the reliance on the handful of swing states that will likely decide the election.

Perhaps the essential battleground, Pennsylvania, did not have a clear winner in 2020 for four days after election day, as officials sifted through a backlog of mail ballots. The state is among only a few that do not permit election workers to process mail ballots until 7 a.m. ET on election day, meaning it could take days before the result is known.

CHINA BOOST

World stocks were mostly higher, with Chinese mainland and Hong Kong benchmarks outperforming after news that the country's services activity expanded at the fastest pace in three months in October—an early sign that Beijing's big stimulus push may be improving confidence.

With the standing committee of China's top legislature meeting this week, too, Chinese Premier Li Qiang expressed confidence that China would meet this year's growth target and that the government had the necessary fiscal and monetary tools for that.

The Australian dollar edged higher after Australia's central bank held interest rates at a 12-year high of 4.35% on Tuesday, as expected, and cautioned that policy would need to remain restrictive for some time.

Japan's Nikkei gained more than 1% after returning from Monday's holiday, as the yen held steady and the corporate earnings season impressed.

Bolstered by this week's higher oil prices, Britain’s markets were also up; however, British government bonds remained on edge after last week's government budget and the weakest demand of the year at Tuesday's 10-year gilt auction.

In corporate news, Boeing shares rose 2% ahead of the bell after U.S. West Coast factory workers accepted a new contract offer late on Monday, ending a bitter seven-week strike that halted most jet production and deepened a financial crisis at the troubled planemaker.

In Europe, Vestas, the world’s largest maker of wind turbines, was a negative surprise, and its shares slid more than 10% due to lower-than-expected third-quarter operating profit and disappointing outlook.

British fund manager Schroders also dropped 10% after reporting net outflows of client funds of £2.3 billion ($3 billion) for the quarter ending September 30.

Key Developments to Watch in U.S. Markets Later on Tuesday:

• U.S. Presidential and Congressional Elections
• U.S. October service sector surveys from ISM and S&P Global; Canada September trade balance
• U.S. corporate earnings: Super Micro Computers, Marathon, Dupont De Nemours, Archer-Daniels-Midland, Emerson, Microchip Technology, Jack Henry, Devon Energy, Assurant, International Flavors and Fragrances, Yum! Brands, Gartner, Progressive, Cummins, STERIS, Henry Schein, Targa, etc.
• U.S. Treasury auctions $42 billion of 10-year notes
• European Central Bank President Christine Lagarde and ECB board member Isabel Schnabel speak; ECB Vice President Luis De Guindos attends the EU finance ministers meeting
• Bank of Canada and Bank of Japan publish meeting minutes

(By Mike Dolan, [email protected])