Uncertainty Reigns: Elections Drive Market Fluctuations

Oh, Biden. Houston, we have a problem. The Democrats are in disarray – some are talking about ‘full panic mode’ - after a rambling performance by President Biden in the debate with Trump. It did not allay fears over his mental capacity. Some are calling on him to step aside.  

Here is one answer: “Making sure that we continue to...  strengthen our healthcare system, making sure that we are able to make every single solitary person eligible for what I have been able to do with the Covid, excuse me, with dealing with everything we have to do... look, if we finally beat Medicare.”

“He’s not equipped to be president. You know it and I know it,” said Trump.

“I would imagine there is going to be a lot of bedwetting [among Democrats] after this debate,” – Kyle Kondik, a non-partisan analyst from the University of Virginia’s Centre for Politics told the FT. Ouch.

Polls showed two-thirds of voters thought Trump ‘won’ the debate.

So, what if Trump wins in November? There could be some pretty big shifts with market implications – more tariffs, more inflation, more debt, a peace plan for Ukraine… not sure if markets are ready for it. Rather like the situation in France and the UK, I am not sure that people fully appreciate how radical it could get.

France goes to the polls this Sunday in what is sure to be a market-moving event. As I said yesterday, I don’t think markets are really braced for this one yet, but we are seeing some stress this morning in the key French assets. French stocks fell on Friday, sliding half a percent whilst shares in London and Frankfurt rose about a third of a percent.  

Franco-German spreads are also getting wider and have hit their widest in more than a decade on the uncertainty.

The rise has exceeded the last spike which we saw in 2017, just before the first round of the presidential election that year. Macron’s win in the first round, which led to a run-off with Marine Le Pen, saw spreads tighten again as markets bet on a Macron victory.  

Markets are showing signs of nervousness again after yields pared back a touch after initially spiking on the EU election results and Macron’s immediate calling of a snap election. This morning, we had a fresh high for the spread.

Meanwhile we look ahead to the economic data with the PCE inflation report. Economists expect more disinflation, and the question is why the Fed wants to stay as restrictive as it is. Real rates have steadily risen since the start of 2022, with the 10yr TIPS up about 100bps since then, albeit are a little way off the peak of last year.  

Why would the Fed stay this tight this long? The core Personal Consumption Expenditures Price Index is set to rise 0.1% MoM and 2.6% YoY in May.  

Japan’s Tokyo core CPI was a bit firmer than expected at 2.1%, which keeps us thinking that the Bank of Japan should be doing something about the weak yen, which crumbled further overnight to a fresh four-decade low. USDJPY shot to 161.280 in Asian trading, paring it back a bit in early European trade but clearly just a one-way bet until the BoJ or MoF step in properly.

Britain’s GDP was revised up, but it makes little difference if you cannot afford groceries, pay the rent, get a mortgage etc. etc. Voters go to the polls next week and the only question is over the size of Labour’s majority.

This will matter to markets though – it will only really become clear once they start changing things. I do not think anyone really appreciates how radical they could be.

US stocks were little changed on Thursday. Semis fell after Micron’s soft outlook. Walgreens and Nike have served up some weak numbers too which point to a more troubled consumer. I think the case for cutting is building but the Fed is maybe going to wait too long.