How to trade U.S. election night and what to expect from Fed, BoE this week
(Kitco News) Markets are counting down the hours until the U.S. election on Tuesday, with the biggest risk posed by either delayed results or a contested election, according to TD Securities. Also, on the radar are two major monetary policy announcements from the Federal Reserve and Bank of England.
Come election night, markets are pricing in a Democratic win, which will benefit gold the most, strategists at TD Securities said on Monday.
"[In] our cheatsheet for election night … we argue that gold markets are particularly looking for a Blue Wave scenario, while a contested election represents the largest risk to gold bugs," they said.
A blue wave scenario could see gold rise around 3% by Wednesday's close, while unknown election results or a contested election could see gold drop by as much as 4% by Wednesday's close, according to TD's chart.
"The risk to gold bugs is that the positioning slate remains bloated, suggesting that it may not take much to catalyze a positioning squeeze," the strategists wrote.
For now, gold's trading pattern remains in its multi-month range. At the time of writing, December Comex gold futures were trading at $1,889.90, up 0.53% on the day.
Current polling sees Democratic candidate Joe Biden winning with 340 Electoral Votes (EVs) and Democrats taking the Senate with 52 seats, TD Securities strategists pointed out, while adding that the betting markets are pricing in a much tighter race on Tuesday.
TD Securities provided the following breakdown for Tuesday evening:
Presidential race: "Florida could report around 11 pm ET. If Biden wins, markets likely price in his victory of at least 340 EVs. However, if Trump wins, that only means a long wait for GA/IA/PA/WI/MI/AZ."
Senate race: "If Democrats steal any of the early races (SC/KS/AK/MT), the market may be comfortable pricing in Democratic control. But if Republicans win as expected, it only means a long wait for IA/ME/NC, plus 1-2 GA races needing a Jan 5 runoff. To price in fiscal expansion, the market needs the Senate results."
In terms of the Fed rate announcement on Thursday, TD's strategists do not foresee any major changes just yet. "We don't expect any new policy announcements at this week's FOMC meeting, although we expect the Fed to ease by extending weighted-average maturity of purchases in December," they wrote.
The Bank of England is projected to accelerate QE at its meeting, which is also taking place on Thursday. "We forecast a £120bn boost to QE at this meeting, in order to keep the program running at the current £60bn/quarter pace through to mid-2021," the strategists said.
TD Securities reminded gold traders that after all the election uncertainty dissipates, investment demand for the precious metal will continue to grow, which will help gold prices advance in the months ahead.