Weekly Review: US Election Uncertainty Triggers Market Volatility – An Unexpected October Surprise! Volatility Mode Activated!

Spot this week Gold Overall upward trend, opening at $1880.49 per ounce, closing at $1898.63 per ounce, reaching a high of $1916.98 per ounce and a low of $1848.83 per ounce. Market risk aversion increased with events such as Trump's announcement of a positive COVID-19 diagnosis and the failure to reach an agreement on a new round of US fiscal policy.

October Surprise Officially Begins

From previous elections, it seems to have become a tradition for sensational news to emerge in October before the election, thus affecting the election results. This is known as the "October Surprise," and it has been effective in the five US presidential elections since the 21st century, such as the Bin Laden speech video in 2004 and the email scandal in 2016. This week, the curtain on the "October Surprise" officially opened.

At the beginning of the week, the market focused on the New York Times' report on Trump's tax evasion. The report stated that Trump only paid $750 in federal income tax when he was elected president of the United States, and that he did not pay federal income tax for 11 of the 18 years covered by the reporter's investigation. Many of his businesses, including golf courses, reported significant financial losses—which helped him reduce his tax liability. The media also claimed that the documents they obtained "included information disclosed by Trump to the US Internal Revenue Service, rather than the results of independent financial checks. They reported that Mr. Trump owned hundreds of millions of dollars in assets, but did not disclose his true wealth." Trump denounced the news as "fake news" at a press conference last Sunday and said he would disclose his actual tax payments after the audit.

Market volatility intensified on Monday, with gold surging as much as $30, leading to speculation that the prelude to the "October Surprise" had begun early. But what people didn't expect at the time was that this drama was spiraling uncontrollably in an unimaginable direction.

On Wednesday, the market experienced a sell-off after Trump and Biden held their first presidential debate. In the debate, described as "chaotic," the two presidential candidates failed to reassure investors on key macroeconomic issues, and Trump once again refused to commit to a peaceful transition of power, further increasing anxiety in the market. Almost all assets except the US dollar fell collectively.

Data from the Chicago Board Options Exchange shows that the VIX futures contract, known as the fear index, has surged to over 30 for the period from October to January next year, typically below 20, suggesting increased volatility in the US stock market in the coming months.

Mark Haefele, chief investment officer at UBS Global Wealth Management, said: "Trump's statement that he will actively protest the results for weeks after the vote count increases the level of uncertainty, potentially leading to higher volatility as we approach election day."

"The market is already agonizing over the election," said Kristina Hooper, chief global market strategist at Invesco. "I expect stock market volatility and short-term stock sell-offs to continue before the election."

On Friday, the market was shocked by the news that Trump had tested positive for COVID-19, and panic reached its peak for the week. Global stock markets fell, while gold, Yen and other risk assets rose.

On that day, US President Trump announced on Twitter that he and First Lady Melania had tested positive for the coronavirus and had begun self-isolation. The White House has canceled Trump's planned fundraising events and campaign rallies, and it is unclear how the isolation will affect the arrangements for the second presidential debate scheduled for October 15 in Miami, Florida.

Bloomberg commented that this would introduce tension into the market, "We could see a 10% correction in US stocks."

The latest news is that Trump has been taken to Walter Reed Medical Center "as a precaution." Reports say that shortly after 6:15 pm ET, Trump left the White House wearing a mask and headed to his helicopter, Marine One. He waved to the media but did not stop to answer questions.

Press Secretary McEnany said in a statement to White House reporters: "President Trump is in good spirits, has mild symptoms, and has been working all day."

"Out of an abundance of caution, and on the advice of his physician and medical experts, the President will be working from the Presidential Office at Walter Reed Hospital for the next few days. President Trump thanks everyone for their tremendous support for him and the First Lady."

Earlier, Trump shared his first video tweet after his diagnosis on Twitter. In the 18-second video, Trump said: "I want to thank everyone for their tremendous support, I think I'm doing well, but we have to make sure everything goes smoothly."

Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York, said: "Trump's positive COVID-19 test is negative for risk sentiment because of the enormous uncertainty." He added that 74-year-old Trump's health could deteriorate due to his age, or he could get sympathy votes. "But until we figure it out, safe-haven assets will continue to climb," he added.

With or Without Agreement

In addition to the US election situation, investors this week are also closely watching the progress of a new round of US stimulus measures. This week, the Democrat-controlled House of Representatives passed a $2.2 trillion package, but has yet to reach an agreement with the Republicans.

US Treasury Secretary Steven Mnuchin said in an interview with CNBC on Thursday that hopes for an agreement rose after Republicans raised the stimulus budget to $1.5 trillion.

House Speaker Pelosi said in a statement on Friday: "We will either pass Chairman DeFazio's bipartisan standalone legislation or include it as part of a comprehensive negotiated relief bill to extend the wage support program for another six months."

Market concerns about whether an agreement can be reached also include Brexit. Brexit-related news this week caused a huge shock to the pound.

At the beginning of the week, investor hopes rose that both sides would reach an agreement at the last minute before the deadline, and the pound surged.

But on Thursday, the EU announced legal action against the UK's Internal Market Bill, which could undermine the previously signed withdrawal agreement. European Commission President Ursula von der Leyen announced that the EU had issued a formal notice to the UK regarding the Internal Market Bill proposed by the British Prime Minister last month. Leyen said that the "deadline for the UK to drop controversial clauses in the draft legislation by the end of September has passed," and claimed that the UK's attempt to unilaterally change the withdrawal agreement reached by both sides last year failed to fulfill its obligation to comply "sincerely" with the terms of the agreement.

The EU has made it clear that the UK now has one month to respond to the European Commission's formal notification. Markets fear this could harm the ongoing trade agreement between the two sides, leading to a no-deal Brexit after the transition period expires at the end of this year. The pound fell sharply, with a swing of up to 100 points.

UK Prime Minister Johnson will hold talks with European Commission President Leyen on Saturday. Although the two leaders may be more focused on reaching an agreement before the end of 2020, the EU's actions yesterday will inevitably be a key topic.

Insiders say that negotiations "have not resolved all major differences" so far. The focus is on future fishing rights and state aid regulations. Johnson has previously claimed to be prepared for a no-deal Brexit.

Economic data increases concerns

Apart from the political situation, the most noteworthy economic data this week—the US non-farm payroll—was also disappointing. The US Department of Labor announced on Friday that the final employment report before the November 3 presidential election showed that 661,000 non-farm jobs were added in September, compared to 1.489 million in August. Analysts surveyed by Reuters had predicted an increase of 850,000 jobs in September.

However Unemployment rate unexpectedly fell to 7.9%. After the release of this data, the decline in US stock index futures narrowed, the US dollar rose after an initial decline, and gold prices fell again after breaking through 1910.

Labor force participation rate fell moderately from 61.9% to 61.4%, as the civilian labor force decreased by nearly 700,000 in September to 160.1 million.

"The participation rate falling to 61.4% shows workers giving up looking for work, leaving the labor force," said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto. "Total employment is still about 10.7 million below February levels, and with the reduction in government stimulus spending, reducing income and consumption levels, the pace of improvement in the coming months is likely to continue to slow."

The US Bureau of Labor Statistics said the improvement in the labor market reflects the continued recovery of economic activity suppressed by the COVID-19 pandemic and efforts to control the pandemic. In September, employment increased significantly in the leisure and hospitality, retail trade, healthcare and social assistance, and professional and business services sectors.

Regarding the latest unemployment rate, the US Bureau of Labor Statistics also pointed out that from March to August, the US Bureau of Labor Statistics will publish an unemployment rate estimate that includes misclassified workers. If calculated in the same way, the overall unemployment rate in September would be 0.4 percentage points higher than reported, but this is the largest error caused by data misclassification. (Last month's error was 0.7 percentage points).

In addition, the US Bureau of Labor Statistics said that the number of non-farm jobs added in July was revised upward from 1.734 million to 1.761 million; the number of non-farm jobs added in August was revised upward from 1.371 million to 1.489 million.

Adam Button, an analyst at Forexlive, said that the US unemployment rate falling below 8% is headline-worthy, but the 0.5 percentage point drop in the unemployment rate was accompanied by a 0.3 percentage point drop in the participation rate. The decline in labor force participation is bad for the economy, indicating that some people are sliding into long-term unemployment or becoming detached from the workforce.

Analyst Dmitrieva believes that overall, the September non-farm payroll report shows that the slowdown in the labor market recovery before the end of the year is greater than expected. Economists have used words like "stagnant" and "cooling," and this report highlights that view. As more businesses close without federal financial support and foot traffic at restaurants and retailers declines, it will become increasingly difficult to find jobs here.

Analyst Matthew Boesler said that the number of permanent job losses in the US is increasing, and at a faster pace than during the 2007-2009 recession. The proportion of long-term unemployed in the labor force peaked at 4.7% in February 2010. This figure was 2.3% as of last month.

Sung Won Sohn, professor of finance and economics at Loyola Marymount University in Los Angeles, said that the economic recovery is continuing, but at a slower pace, partly because government stimulus measures have been significantly weakened. We are seeing more layoffs and bankruptcies. I wouldn't be surprised to see employment fall again before the end of the year until the next administration gets more support.