Investors brace for volatile trading week as US election draws near

Global investors are bracing for a week of volatile trading in financial markets before one of the most closely fought US elections in history.

As voters in the world’s largest economy prepare to head to the polls on Tuesday, the dollar and the yield on US Treasury bonds fell on Monday as investors pared bets on a Donald Trump victory.

The greenback dipped 0.6% against a trade-weighted basket of currencies, dropping to its lowest level in two weeks after a surprise opinion poll showed Kamala Harris ahead in Iowa, which had previously been expected to be a safe state for the Republicans.

The yield – in effect the interest rate – on 10-year US Treasury bonds fell by about nine basis points to 4.28%.

Trump has been ahead in betting markets, despite trailing in opinion polls, leading to what Wall Street has called the “Trump trade” – a bet that his policies could lead to a boost for share prices, Treasury yields and the dollar.

Analysts expect Trump’s proposals for punitive import tariffs could reignite inflationary pressures in the US, slowing the pace of interest rate cuts from the Federal Reserve. Markets expect a Harris administration would be relatively similar to the status quo.

Expectations of a Trump win had fuelled a rally in the dollar in recent weeks, although figures on Friday showed an unexpectedly weak reading from the US jobs market, which is likely to encourage the Fed to cut interest rates when its policymakers gather after the election to set borrowing costs on Thursday.

Investors said the presidential race going down to the wire meant financial markets were poised for a volatile week, with analysts at Deutsche Bank suggesting it could be the closest run in American history. “If it’s close, stand by for a long few days,” said Jim Reid, an analyst at the bank.

Some results in key swing states could become apparent within the first 24 hours of the polls closing on Tuesday, he said, but others could take longer, while there is also the potential for recounts.

Brad Bechtel, an analyst at Jefferies, said: “I don’t think anyone has any idea what will transpire, although a tremendous amount of ink has been spilled trying to strategise around it. More likely than not though, it will take a few days to clear all the volatility, with things too close to call. With any luck we get a decisive victory one way or the other, so we can all move on, but I’m not holding my breath for that.”

With investors poised for sizeable market moves, the Bank of England is widely expected to push ahead on Thursday with a quarter-point interest rate cut from the current level of 5% amid cooling inflation and weaker growth in the UK economy.

The central bank is expected to take into account Rachel Reeves’s budget measures announced last week, amid market expectations that Labour’s plans to raise spending and borrowing could slow the pace of interest rate cuts in future months.

Investors had anticipated the base rate would be lowered as many as five times to 3.75% before the end of next year, but moved after the budget to price in reductions to 4%, reflecting the potential that Reeves’s plans would add to both inflation and economic growth.

Thomas Watts, a senior investment analyst at the fund manager Abrdn, said: “Whilst the fallout from the US elections could quite literally trump whatever goes on in the markets, the mixture of central bankers and politics could well cause fireworks for investors, aptly in a week that contains Bonfire Night.”