Assessing the signal in a backdrop of rising noise

US, UK, and EU corporate earnings increase in frequency, with 19% of the S&P500 market cap set to report, and this could offer tactical traders the opportunity to capture the volatility that earnings and company guidance offer. On the calendar, we see a number of Pepperstone’s US 24-hour share CFD offering reporting quarterly numbers – including Boeing, IBM, Tesla and Amazon, with Tesla likely to get the full attention of clients. Options imply a -/+6% move on the day of Tesla’s earnings, which if proved to be correctly priced would be the lowest percentage change in the share price on the day of earnings since the Q122 earnings. That said, a -/+6% move (on the day) is still a fair level of movement for the short-term traders to get interested in.

For those trading the German DAX40 this week, consider that SAP report on Monday, and given its market cap of E261b and 10% weighting on the DAX, SAP are by far the most influential stock in the index, at least from a variance perspective. With SAPs options implying a -/+6% move on earnings, the reaction to the numbers and guidance could be incredibly influential on the German equity index.

On the economic data side, we see a raft of tier 2 (typically less impactful) releases in the US, although the Fed’s Beige Book may get some increased airtime given the Fed recently emphasised that they have upweighted this input in their thought process.

PMIs in the Eurozone, UK, and US may get some attention and most-so in Europe, where after the move down to EURUSD to 1.0811, the risk is we see a more pronounced rally on better data, than a further decline on a miss. The Bank of Canada should cut rates by 50bp to 3.75%, although this upscaled cut is largely priced, and the reaction in the CAD should therefore come from the level of appetite for another 50bp cut in the following meeting in December.

The PBoC should cut the 1 & 5-year Prime Rate by 20bp respectively, although how influential further easing proves to be in China/HK equity and the CNH is up for debate, as market participants may be feeling a sense of policy easing fatigue.

While in central bank land chatter, through the week we hear from 10 Fed speakers, 4 BoE speakers (including Gov Bailey x3), 15 ECB speakers, RBNZ Gov Orr (24 Oct 00:00 AEDT), and RBA Deputy Governor Hauser.

The Playbook for the Week Ahead

Given the limited tier 1 US economic data this week, the risk is that the US election and US company earnings get increased focus. In FX markets, the USD index closed higher for a third week, gaining ground against all G10 currencies, notably vs the NOK, which faced the headwind of an 8% w/w decline in the crude price. LATAM FX (notably the CLP and the MXN) has also been on sale, and while better US growth and reduced Fed rate cut expectations can largely be attributed to the march higher in the USD, we also question the degree of US election risk currently priced into the MXN (and other tariff expressions) at current levels.

An increased focus on the US election

With just 15 days to go until the US election, traders need to decide if now is the right time to start placing election trades with greater conviction. The clearest expression of Trump tariff risk remains long USDs vs MXN, CNH, and EUR, and this certainly makes sense if you believe the betting markets offer any kind of reliable signal. With the weight of money flowing firmly on Trump, we see the former president ahead by some 16-20 percentage points. This is some lead, although there remains a level of cynicism about using betting markets as a true signal, given the view that higher implied odds may be part of Trump’s campaign promotion.

Taking another view, we see that the average of all polls (source: RealClear Politics) offers a different perspective, and while Trump is ahead in all 7 of the key battleground states, the leads we see are all within the margin of error, suggesting the race is still far tighter than what is implied in the betting markets. Still, for some, Trump’s implied lead may be tough to ignore and could result in increased hedging of tariff risk through the week, even if we think the signal-to-noise ratio that we see from the odds vs polls remains poor.

The risk for GBPUSD is skewed lower

GBP may not be a default expression of Trump tariff risk, but after the lower-than-expected UK CPI print, a 30bp decline in the UK earnings, and expectations of a credibility-winning budget (due 30 Oct), UK gilts have found buyers and have outperformed its DM peers. GBPUSD may have held the 1.3000 level, but with the UK-US 10yr bond yield spread having declined from 22bp (on 26 Sept) to -2bp, if the yield on UK 10yr gilts continues to push to an ever-greater discount to that of the US 10-year Treasury, then GBPUSD may well be trading sub-1.3000 soon enough.

Gold and silver – The new momentum beast

Gold and silver screen strongly on the ‘5-day % change’ dashboard (see above), and client flow in both instruments over the past few days has been significant. Both closed on their respective highs on Friday, highlighting the strength in the move as the sellers simply stood aside. In the ETF space, we can observe huge volume in both the GLD and SLV ETFs on Friday’s close. Given the large open interest in 0 DTE (Days to Expiry) call options at the $248, $249, and $250 strikes (in the GLD), one can assume that a key driver of the gold and silver move on Friday was catalysed by option dealers hedging flows. With market makers (who sold the calls) dynamically reacting to the rise in the underlying price and hedging exposures and buying GLD/SLV ETFs and gold futures – perpetuating the rally seen in the precious metals complex.

Equity Risk – Sensing a change in the risk v reward trade-off

Turning to equity risk, for the past two weeks I have gone into the new week suggesting that those positioned long of various equity indices would be feeling good about life. I’m not sure much has really changed, with the Fed likely to cut by 25bp in November, but US data is still highly supportive of risk-taking, and company earnings look solid. However, with the market likely to look more closely at US election expressions this week, if traders choose to increase hedges around Trump tariff risk, a push above 20% in the VIX index would indicate markets are growing increasingly nervous about the negative effects tariffs could have on US company margins, where a one-off rise in the price level could weigh on real consumption and impact US GDP estimates.

It feels like the risk vs reward trade-off for initiating new longs in the S&P500 and NAS100 is shifting, and the same can be said for the ASX200, NKY225 and EU equity indices. However, an open mind and an intent to react dynamically to the ensuing price action and the underlying flows will serve traders well. A break and hold above 5927 in S&P500 futures and above 20,680 in NAS100 futures would keep the bullish momentum in check and negate any concerns of market players looking to de-risk into the election – at least for the week ahead.

Good luck to all.