Rise and shine everyone.

It’s US election day. Contrary to how the year started out, it’s shaping up to be a very exciting election with results “too close to call” as everyone’s putting it. These last days are the most challenging because now it’s here and we may have to wait a few days before we actually get all the results. Where is AI when you need it, right?

The odds of the house and senate being taken by the Republican Party seem to be higher. A Democratic Party sweep may cause some stir in the markets, for fear that tax hikes will ensue. A Red sweep on the other hand will likely mean higher spending and this could push rates higher. Now, interestingly the market is also predicted to move higher if there is Red sweep, and yes we could see a rally even if long-end rates move higher. However, I think anything above 4.5% could start to become challenging for small caps, and unprofitable companies in particular.

We’ve seen this happen in the past, when the 10Y crosses 4.3% we start to see pressure, and above 4.5%, nothing good happens. ⤵️

It is also Central Bank week, and the Reserve Bank of Australia (RBA) kept interest rates unchanged, as expected while cautioning that inflation remains “too high” and signaling openness to future adjustments. The Australian dollar and yields showed little reaction. The RBA’s latest guidance suggests rates have likely peaked, with potential declines starting around mid-2025, targeting 3.5% by late 2026—slightly above prior forecasts. Governor Bullock emphasized continued high inflation in services. Ahead of the RBA decision, bond yields flattened, with 3-year yields up 6 basis points and 10-year yields up 1 basis point.

China’s October Caixin Services PMI beat expectations, reaching its highest level since July, driving Chinese and Hong Kong stocks up 1.4%-1.9%. Japan’s Nikkei rebounded 1.3% following a Monday holiday after a 2.6% drop last Friday. Meanwhile, South Korea’s CPI reached a four-year low, potentially setting the stage for more rate cuts.

Observations on China from GS ⤵️

Chart of the Day

Some observations from GS into the event. Volatility stress is high.

SPX top of book liquidity has dropped by ~50% since mid October

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)