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Nasdaq 100 Tops Election Focus, GBPUSD Focuses on Central Banks, USDCNH Trade Wars

Nasdaq 100 Tops Election Focus, GBPUSD Focuses on Central Banks, USDCNH Trade Wars

John Kicklighter, Chief Strategist

EURUSD, USDJPY, GBPUSD, AUDUSD Talking Points:

  • The count on the US Presidential election continues into a third day as betting markets and polls swing remarkably from expectations of a Biden to Trump back to a Biden Presidency
  • Despite the uncertainty, risk appetite showed up through US indices; but a particularly acute charge for the tech-focused Nasdaq points to a particular risk nuance
  • A US Dollar intraday reversal shows the fundamental oscillation, but USDCNH and GBPUSD reflect more distinct fundamental issues
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Fundamentals a Hierarchy and US Elections Still Top the List

I am a believer in both fundamental and technical analysis. A purist from the latter camp – of which I know many – would say it doesn’t matter what the competing fundamental matters and the complicated pressure for mass influence are as price ultimately reflects the view of the masses. That may be true for the present moment, but that doesn’t account well for the market’s propensity for speculation which can lead markets astray nor for situations where competing matters can temporarily look like calm or ambivalence. Such a mirage seems to have been present this past session. ‘Risk appetite’ was on the rise while uncertainty was still prevalent as the focus started to bring in matters a little beyond the immediate concern. Yet, preoccupation with the results of the US Presidential election is still front and center. Though there are still key states not yet called and neither candidate with the necessary 270 electoral votes, betting markets have shifted heavily to former Vice President Joe Biden.

How could US elections impact the markets? Click here to see our aggregate report on themarket reaction to election.

Chart of PredictIt Betting Markets Expectations of Election Outcome

Nasdaq 100 Tops Election Focus, GBPUSD Focuses on Central Banks, USDCNH Trade Wars

Chart from PredictIt.org

There are still ballots that are being counted and challenges being raised on the results claimed in a range of states (the Trump administration has filed suits in states like Arizona and called for recounts in states like Michigan), but markets are starting to move to price a path forward. What is therefore somewhat surprising – at least for me – is that the ‘buy the rumor’ on a Biden Presidency is still an actual bullish lean when the projections for the houses of Congress are for a maintenance of the past four years: Senate remains GOP led and the House of Representatives with the Democrats. That raises questions over the ability to push important items like stimulus, but it also seen as curbing some of the unfriendly business policies floated by the Democratic party – like pressure for higher taxes on major tech companies. That perhaps explains some of the greater relative strength for the Nasdaq 100 relative to its broader US equity health.

Chart of Nasdaq-SPX Ratio and 50-Day Moving Average Overlaid with S&P 500 (Daily)

Nasdaq 100 Tops Election Focus, GBPUSD Focuses on Central Banks, USDCNH Trade Wars

Chart Created on Tradingview Platform

In general, however, the presumption that a clear outcome will support risk-sensitive capital markets is not too surprising against the backdrop of the scenarios frequented in trading circles – and in my own poll results below. Whether a Trump or Biden win, the collective view for a bullish outcome was a 75 percent forecast for a bullish S&P 500. Yet, the question we will increasingly see processed is: how much of the bullish outlook has already been priced in against a difficult fundamental horizon ahead?

Twitter Poll On S&P 500 Response on Election Outcomes

Nasdaq 100 Tops Election Focus, GBPUSD Focuses on Central Banks, USDCNH Trade Wars

Poll from Twitter.com, @DailyFX

The Dollar Is Still Unclear on Its Speculative Allegiances

Moving towards clarity on the election results, particularly with probabilities supporting a more global-friendly administration, it is also surprising that the Dollar is not benefiting alongside local equities indices. The DXY Index initially rallied this past session but ultimately gave up the majority of its gains by the end of the session. The result was the biggest upper ‘wick’ signaling intraday reversal since the height of the pandemic. This could be a reflection of a tempered haven appeal, but relative matters of coronavirus response and stimulus likely factor in as well.

Chart of DXY Dollar Index with 100-Day Moving Average and Daily Wicks (Daily)

Nasdaq 100 Tops Election Focus, GBPUSD Focuses on Central Banks, USDCNH Trade Wars

Chart Created on Tradingview Platform

It is interesting from a retail speculative view that the world’s most liquid currency pair, EURUSD, has seen a sharp reduction in its underlying short interest (long Dollar) with this past session’s volatility and failed breakdown. It seems ranges are a more comfortable state which will further the importance of the next critical fundamental matters like economic pace, coronavirus response, fiscal stimulus plans and monetary policy among other factors.

Chart of EURUSD with IG Retail Trader Positioning (Daily)

Nasdaq 100 Tops Election Focus, GBPUSD Focuses on Central Banks, USDCNH Trade Wars

Chart Created by DailyFX

Key Fundamental Themes We Are Wading Into As Election Anxiety Settles

Speaking of matters that will start to take over as the US elections wind down, I still believe the combination of stimulus intent and the coronavirus response are a key combination – as was reflected in my poll. That said event risk will draw attention to different matters at least temporarily. In today’s session, there are two key central bank rate decisions (learn more about why central banks are important to markets in our DailyFX education section). The Federal Reserve is the most prominent, but there is little benefit for them to move from a wait-and-see perch given the state of play. Alternatively, the Bank of England is drawing speculation of more stimulus, possibly to the tune of 150-200 billion Sterling of fresh QE and even discussion of negative rates. Watch GBPUSD closely through this event risk.

Chart of GBPUSD with 100-Day Moving Average Overlaid with UK-US 10-Year Yield Spread (Daily)

Nasdaq 100 Tops Election Focus, GBPUSD Focuses on Central Banks, USDCNH Trade Wars

Chart Created on Tradingview Platform

On the broad economic scale, appreciation for event risk this past session was overlooked in favor of more urgent headlines. However, the service sector-dependent US economy showed some pressure on the dominant source of its growth and jobs. It is an early and modest slip from the ISM non-manufacturing measure just yet; but we will be reminded of its importance as close in on Friday’s NFPs.

Chart of S&P 500 Overlaid with ISM Manufacturing and Services Activity Surveys (Monthly)

Nasdaq 100 Tops Election Focus, GBPUSD Focuses on Central Banks, USDCNH Trade Wars

Chart Created by John Kicklighter with Data from ISM

Further afield, I am still watching the activity in USDCNH. This exchange rate between the world’s two largest individual economies is not considered the bastion of free market price discovery, but the volatility is unmistakable and political implications from course should not be ignored. This pair experienced an enormous reversal this past session resulting in the largest daily range since August 11, 2015 – after a surprise revaluation of the Yuan. A persistence to new multi-year lows seems to be as much China’s intention to show self sufficiency as it does a confidence that trade relations with the United Sates are set to actually improve, as that seems unlikely regardless of the administration. Read more on what may happen with trade wars moving forward.

Chart of USDCNH with 50-Day Moving Average and 1-Day Historical Range (Daily)

Nasdaq 100 Tops Election Focus, GBPUSD Focuses on Central Banks, USDCNH Trade Wars

Chart Created on Tradingview Platform

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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