Geopolitics Driving Markets

Global markets are processing mixed developments from Japan and the Middle East, which have kept the US dollar trading within a narrow range as the week opens.

In Japan, the ruling coalition has, for the first time in 15 years, lost its majority in parliament. This setback comes as voters focus sharply on soaring inflation and recent political scandals. The USD/JPY pair rose by approximately 1% following some loss of momentum in the US session, yet remains on course for a fifth consecutive weekly gain.

Tempering the dollar’s gains is the reduction in Middle Eastern tensions, after a previously anticipated Israeli retaliatory strike did not target Iran's oil and nuclear facilities. Consequently, Brent crude has declined around 13% from its peak in early October, as investors turn their attention to the upcoming US elections, the non-farm payrolls report, and the next Federal Reserve policy decision.

Could the US Election Defy Economic Precedents?

Market sentiment is shifting, with a higher probability now priced in for a Trump victory. Voters continue to regard inflation as the most pressing issue, followed by immigration and overall economic health. Each of these concerns remains intricate and nuanced, which is keeping poll results within a narrow margin of error.

Since 1929, no incumbent party has lost an election if the US economy avoided a recession in the preceding two years. Superficially, this trend appears to favour the current administration, yet two key factors complicate the outlook. First, while the US did experience two consecutive quarters of contraction in 2022, this so-called "phantom recession" was not formally classified as such by the NBER. Second, approximately 60% of voters describe the US economy as poor, a perception largely fuelled by inflation, which may limit the Democrats' economic advantage.

Major US Jobs Data Kicks Off "Jobs Week"

Shifting focus away from geopolitics, the US economic calendar features crucial labour market data this week, although its impact may be moderated by other market drivers.

The series begins tonight with the JOLTS report, measuring job openings and labour turnover, with market expectations suggesting openings will hold steady at around 8 million. With the US dollar strongly supported throughout October, any further robust data points may contribute to additional greenback gains.