After an acrimonious and volatile campaign, the long-awaited election is finally here. Macro assets everywhere are hyper focused (and perhaps overly focused) on the last minute fluctuations in polls, where polymarkets saw a large drop in Trump-odds from 67% down to 55%, moving in line with most other mainstream polls that are calling it a 50–50 bet.
The election focus distracted the market’s attention a bit from Friday’s NFP, which saw a massive miss as headlines came in at 12k vs 100k expected. While recent labor strikes and hurricanes contributed to part of the downside, economists believe there to be a continued and genuine slowdown in the jobs market, with permanent job losses rising to a new recent high along with a jump in folks being unemployed for 15 weeks or more. In further details, private payroll employment dropped by 28k, with large declines in manufacturing (-46k) and professional & business services (-47k). Furthermore, payroll growth was revised substantially lower in the last two months with the final August # coming in at just +37k.
Despite the big miss, markets were unfazed ahead of the US election. Treasury yields reversed their knee-jerk reaction post NFP to end Friday 4–10bp higher across the curve, with 10y approaching 4.40% as bond traders are still hedging against a Trump-win. Equities climbed back to a small rally despite underperformance in momentum, small cap, and high beta names on the day, while the USD strengthened notably against the GBP (UK budget concerns) and JPY (carry).
In terms of rate expectations, markets are still pricing in just one rate cut later on this week despite the labour data, and consecutive 25bp moves thereafter, but that path is likely to change depending on the final election results.
Switching gears back to elections, polls have pretty much reverted back to a dead-heat on a late Kamala resurgence, though we imagine that actual market positions remain hedged for a Trump win. More than most election results in recent memory, market reactions are likely to be extremely binary with a Trump win likely continuing the move in higher yields / stronger USD / higher crypto, and a Kamala-win to lead to the opposite. However, we also believe that markets are likely to over-price the short-term impact of either victory, and expect lots of re-calibration and revisiting of more structural themes once the dust has been cleared.
Furthermore, with the election being such a close-call, everyone is suddenly an expert on US elections and battleground swing-states. We will attempt to do our part and pretend we know what we are talking about for the next 48 hours (thanks to the help of others).
The Electoral College (EC) system rests the entire US election on just 7 swing states, with a particular focus on Pennsylvania being the largest holder of EC seats (19). Current polls (from RealClearPolitics) show a Trump advantage in 5/7 battlegrounds, with a razor thin lead in Pennsylvania.
In terms of timing, we will start seeing exit polls start to surface at 5pm EST on election day (Wednesday morning Asia time), and official polls will close by 10pm EST. In the 2016 election, the States made their official calls between 1 to 8 hours after the close, though the infamous 2020 election dragged on for days (and weeks), which led to the subsequent discord and events on Capital Hill afterwards. Markets would not be pleased with a repeat of delayed results with likely a risk-off reaction, especially in light of the election fraud accusations and deep electorate polarization at the moment.
In any case, we would expect to see the Presidential results being called earlier than the House, given possible toss-up delays in NY and CA. A red Republican sweep would obviously be a big risk-on boost for asset markets, though we might not get clarity on that until towards the end of the week.
In no exaggeration terms, trading is going to get much busier for the rest of the week with prior elections seeing a 50–100%+ jump in trading activity on the day and week after the election day. With even more focus and drama on the current election versus the prior episodes, we would expect near-term trading activity to boom similar to the surprise Trump win in 2016.
Finally, in terms of crypto, BTC returned to early after coming in within a stone’s throw away from ATHs, before falling back to sub-70k on the latest fall in Trump’s election odds. Coinglass reported over 500M in long BTC futures liquidation as we fell back against ATHs. So close, yet so far.
Open interest in BTC futures and options have been climbing steadily over the past month, and particularly on CME. While part of that is due to the continued mainstream interest in crypto, another source of the interest might be coming from a HF basis trade in Microstrategy, where funds might be looking to trade the ‘basis’ between a BTC futures long vs a short in MSTR. MSTR’s stock price has gained over 250% YTD, while BTC is up 65% and Coinbase at just +5%. Questions abound as to why TradFi investors are choosing to buy the stock instead of the spot ETF or mining proxy, of which we have no good answers to as of now.
To make matters worse, Michael Saylor recently announced a fresh $21B of equity issuance (a new share record!) to fund additional BTC purchases, part of a continued move to buy up to $42B in BTC over the next 3 years. Despite the massive dilution, the stock managed to stay flat while the overall crypto complex was weak with Coinbase trading down -10% after earnings. Maybe it is easier to speculate on macro and political outcomes than on single names afterall!
Rest up and good luck this week!!!
