Daily Comment (November 4, 2024)
by Patrick Fearon-Hernandez, CFA, and Thomas Wash
[Posted: 9:30 AM ET] | PDF
Our Comment today opens with a few words on tomorrow’s election, which we still consider a coin-flip. We next review several other international and US developments with the potential to affect the financial markets today, including an OPEC+ decision not to start boosting oil production as early as planned and an outlook for the Federal Reserve’s latest monetary policy decision on Thursday.
US Elections: Election week is now upon us, and voters tomorrow will cast their ballots for president, senators, representatives, governors, state lawmakers, judges, county commissioners, referenda, initiatives, bond proposals, and probably even a local dog catcher or two. At least 65,000,000 voters have already cast advance ballots. In our view, the race for president and Congress remains too close to call and could go either way, from a landslide for the Republicans to a landslide for the Democrats.
- Our read of the situation is based on a broad, triangulated reading of the opinion polls, betting markets, analysis by reputable political observers, and insider commentary. No matter who you support in the election, we would caution against over confidence, since that could merely set you up for disappointment and anger.
- Supporting our view that the election could go either way, we note that a range of indicators point in different directions. For example, recent polls point to a rebound in support for former President Trump and betting markets suggest the odds are highly in his favor, but other data consistently shows that Vice President Harris enjoys higher enthusiasm among her supporters and out-sized support among women.
- In fact, a new poll suggests Harris could even win Iowa. The poll underscores a potential swing toward her, which has boosted bond prices, pushed down yields, and weighed on the dollar so far this morning. The benchmark 10-year Treasury yield has fallen this morning to 4.288%, and the US Dollar Index is down a sharp 0.6%.
- In any case, stock market performance has historically averaged about the same whether it was a Republican or a Democrat in the White House. The more important issue may be whether we end up with a unified or split government. Historically, the market has performed best in a split government, when one party has the White House and the other has at least one chamber of Congress. Given today’s close division of support, we believe there is a good chance that we’ll end up with a market-friendly split government.
- Finally, we note that emotions are high, and politicians and foreign agents alike appear to be prepping the ground for protests or even violence once the results are announced. We can’t discount the possibility of political and legal uncertainty, protests, or even localized violence between Election Day and Inauguration Day. As of right now, however, we think any such developments would be relatively short-lived and contained.
Global Oil Market: In a notice posted Sunday by the Organization of the Petroleum Exporting Countries, Saudi Arabia and seven other oil-producing nations said they wouldn’t implement their plan to gradually hike oil production until at least late December. The move likely reflects the current over-supply of oil amid strong US output, weak economic growth in China, and reduced demand for automotive gasoline as consumers buy more electric vehicles.
Global Wine Market: New data from the International Organization of Wine and Vine shows global wine consumption in 2023 fell to 221 million hectoliters, down a full 10.5% from 2017. The drop is the equivalent to about 3.5 billion bottles of wine per year, largely because reduced consumption by baby boomers isn’t being offset by younger drinkers. The decline has led to excess supplies of both wine and grapes, which is starting to weigh on prices.
Germany: The fragile three-party coalition government was thrown into further disarray on Friday evening when someone leaked an economic position paper by Finance Minister Lindner, who heads the coalition’s liberal Free Democratic Party. The paper argued for new tax and spending cuts, which are at odds with the policy proposals of the other coalition partners, the center-left Social Democratic Party, and the left-wing Greens. The disagreement could shatter the coalition and bring it down shortly after the US election, leading to a weak caretaker government.
United Kingdom: The Conservative Party on Saturday elected former Minister of Business and Trade Kemi Badenoch as its new leader. Badenoch, whose parents are Nigerian immigrants, has vowed to shift the party more aggressively to the right, with a focus on social issues such as further curbing immigration and combating “woke” culture. However, the more popular Labour Party is likely to remain in power until the next scheduled elections in summer 2029.
Moldova: In a run-off election yesterday, President Maia Sandu won a second term with 55.4% of the vote, beating the Russia-backed opposition candidate Alexandr Stoianoglo. The win by Sandu will help keep the small, Eastern European country oriented toward the West and focused on its effort to eventually join the European Union.
Australia: Fitch Ratings today reaffirmed Australia’s stellar sovereign debt rating of AAA, with a stable outlook. The firm praised Australia’s “high income per capita and sound medium-term growth outlook, as well as [its] strong institutions and an effective policy framework.” Still, it also noted the budget deficit would likely widen to 2.6% of gross domestic product in fiscal year 2025, up from just 0.8% in FY 2023, largely because of tax cuts and fast spending hikes.
China: The Ministry of Commerce and the China Securities Regulatory Commission have announced easier rules on Qualified Foreign Institutional Investors (QFIIs) seeking to buy Chinese “A” shares, which trade only on the mainland and can’t be directly purchased by foreign individuals. To qualify as a QFII, for example, the new rules require the institution to have capital of at least $50 million or assets under management of at least $300 million, down from the previous requirements of $100 million and $500 million, respectively.
- The move is consistent with the economic stimulus measures Beijing announced earlier in the autumn, which partly aimed to boost Chinese stock prices and give Chinese citizens a viable alternative way to build wealth as the country’s residential housing market continues to struggle.
- The eased rules are also consistent with Beijing’s newly adopted goal to make China a “financial superpower.” However, even with the new changes, Beijing will still have tight control over cross-border inflows and outflows of capital. Those controls will likely keep acting as a disincentive to foreign investors and inhibit the renminbi from becoming a more viable reserve currency.
China-Peru-United States: The head of US Southern Command, Army Gen. Laura Richardson, has warned that a new China-funded megaport in Peru could be used by the Chinese navy. The new port, due to be inaugurated by General Secretary Xi this month, is the latest example of Beijing’s strategy to build ostensibly civilian maritime facilities around the world, which it could then use for naval operations in a conflict. Since the Peru port could allow the Chinese navy to threaten the western approaches to the US, it could further worsen US-China tensions.
- On a related note, the head of US Space Force, Gen. B. Chance Saltzman, warned late last week that China is developing and launching space weapons at a “mind-boggling” pace. According to Gen. Saltzman, China and Russia are both demonstrating an ability to conduct warfighting in space, which he called “very threatening” to the US and its allies.
- To reiterate, the continued aggressive military buildup by China and Russia are likely to further exacerbate US-China tensions, creating continuing risks for investors.
US Monetary Policy: The Fed holds its latest monetary policy meeting this week, with its decision due to be released on Thursday at 2:00 PM ET. The policymakers are widely expected to cut the benchmark fed funds interest rate by 25 basis points to a range of 4.50% to 4.75%, and we agree with that assessment. However, because of the underlying strength in economic growth, relatively tight labor markets, and continued price pressures, we still think the pace and endpoint of future cuts could leave investors disappointed.
US Stock Market: Reflecting how fortunes have shifted for two of the country’s key technology giants, Dow Jones late last week announced that Nvidia, the graphics processor maker turned artificial-intelligence darling, will replace Intel, the past king of central processing chips that is now struggling to compete, in the Dow Jones Industrial Average. The change will be effective prior to market opening on Friday, November 8.