Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Key points:
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Webinar replay: Trading the 2024 US election
Macro events (times in GMT): UK Octo PMI (Final) 0930, US Sept Trade Balance (1330), US Oct ISM Services Index (1500), US Election Day/night
Earnings events:
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Equities:
Volatility: With election day upon us, volatility metrics reflect a subdued outlook, as markets largely anticipate results to begin impacting trading after the initial counts are released. The VIX sits near 21.9, showing limited upward movement as the market holds its breath. The one-day VIX (VIX1D), representing expected intraday volatility, has eased slightly but remains elevated at 14.6, signaling some anticipation of short-term price shifts as results start coming in later today.
Implied moves for the S&P 500 and Nasdaq remain moderate, with an expected swing of ~0.63% for the SPX and ~0.82% for the NDX, pointing to a calm trading session during the day as traders await final results. However, with the Federal Reserve's interest rate decision looming on Thursday and potentially significant policy shifts in play, traders are likely maintaining positions to hedge against volatility post-election. Additionally, the heightened put/call ratio at 1.56 suggests a lean towards protective positioning, indicating underlying caution among investors.
Fixed Income: European sovereign bonds closed the day mixed. German Bunds underperformed U.S. Treasuries, weighed down by a poll indicating Kamala Harris leading in Iowa, a state Trump won in the past. Money markets kept ECB rate-cut expectations steady, with 28 basis points projected for December and 122 basis points by the end of next year. UK Gilts held steady, with 10-year yields at a one-year high following the UK autumn budget announcement last week. Traders continued to anticipate a 22-basis-point rate cut from the Bank of England this week and 30 basis points by year-end. Meanwhile, U.S. Treasuries rallied, with yields dropping sharply at the open as polls showed Vice President Harris gaining ground on former President Trump. The gains held throughout the day, despite a lukewarm reception for a 3-year note auction that slightly tempered momentum. The 10-year yield settled at approximately 4.315%, after dipping as low as 4.26% earlier in the session
Commodities: Crude prices have returned to their mid-range, supported by OPEC+'s move to further delay a planned production increase, and continued tensions in the Middle East with Iran reportedly planning an attack on Israel after the U.S. election. Elsewhere, a softer USD and U.S. Treasury yields driven by fresh Harris momentum helped stabilise gold, while silver is still holding just above a key area of support. Copper trades higher for a third day, supported by recent economic data strength and hopes Beijing will announce more support measures. In addition, a late surge in the polls for Harris has reduced the risk of a Trump 2.0 and his promised increase in trade tariffs.
Currencies: The US dollar dipped to start the week yesterday, posting local lows briefly as US treasury yields fell back after a sharp run into the end of the week. This may have been in correlation with rising odds in probability markets that Trump will not win the US presidential election. The greenback regained its feet as investors and traders await the outcome of that election, with the first polls closing at midnight tonight.
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