Cross Market Analysis - Markets Gear up For Upcoming US Elections

FX – GBP/USD

Traders pushed the US dollar higher against major world currencies ahead of upcoming elections. Though it is perhaps unclear that this reflects expectations of electoral gridlock, implied volatilities at or near record lows show that markets expect few surprises in the voting process. This is particularly pronounced in the EURUSD pair, as currency options currently show 1 week implied volatilities at a fresh record low. As the best predictor of volatile moves, these implied vols forecast currency prices within a very narrow range through the coming trading sessions. How this actually plays out will be particularly interesting for the GBPUSD, which remains just shy of 18-month highs of 1.9147. If tomorrow’s elections show any unexpected results—namely, a single party majority over both branches of the legislature—we could see substantive moves in dollar-denominated currency pairs. In fact, a dollar-bearish turn could lead the GBPUSD to challenge a significant price ceiling at 1.9150. On the flipside, continued gridlock could boost the US currency and send the GBPUSD off of its recent highs.

Equities – S&P 500 Index                                                                

US stock markets stand to gain the most out of an electoral stalemate, as a mixed legislature would make it much more difficult to pass laws that challenge the status quo. Indeed, domestic equities have resumed previous strength on an unclear outlook for tomorrow’s elections. Today’s rally could come to an abrupt end, however, if voting produces a decisive victory for the Democratic Party. Given that markets typically view the center-right Republican Party as pro-business, risks remain to the downside if their center-left counterparts win both the House of Representatives and the Senate in tomorrow’s elections. A Republican victory in the bicameral legislature would arguably produce the strongest reaction, but a political stalemate would likewise prove bullish for stocks. An even distribution of power would effectively prevent uncertainty over the future of fiscal policy—with neither Republicans nor Democrats powerful enough to challenge laws as they stand.