Wednesday, September 30, 2020

Key takeaways from the first presidential election debate; is this an opportunity for gold?

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  • Gold
  • XAU

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Analysts’ Pick: Key takeaways from the first presidential election debate; is this an opportunity for gold?

  • Today’s presidential election debate indicates the concern among market participants on a possible refusal of handover of power post-election results
  • Delays in vote tallying may increase this likelihood, if Trump wins on in-person tallies before losing on in-mail ballots
  • Gold remains likely to have strong positioning, with it trading with limited downside in relation to the Nasdaq 100

The first presidential debate transcended into a volley of interruptions earlier today as Democrat presidential candidate Joe Biden and US President Donald Trump continually talked over each other during the process. But here are some key points from the debate:

  1. Trump continues to waiver on commitment mail-in votes, saying that if he sees "tens of thousands of ballots being manipulated, I can't go along with that."
  2. Trump and Biden's stances on policy both remains the same despite efforts from each candidate to discredit the other
  3. Biden continues to attack Trump on the pandemic issues, arguing that Trump has been ineffective in controlling the spread of the virus. While Trump argues that his earlier ban on travellers from China helped to prevent the spread of the virus in the US. Trump also mentions the ongoing protests while continuing to reiterate his law-and-order message.

The immediate impact of the debate appears to be mostly negative, with S&P500 e-mini futures reversing all of its gains earlier in the day to fall more than 1% lower in the hours following the debate. The drop may have been due to greater uncertainty as Trump's comments highlights the impending uncertainty that could potentially surface during the period following the announcement of the presidential election results.

The key concern that may be on market participants' minds may be the controversy surrounding the mail-in ballots. With the onset of the pandemic likely to impact voting during the presidential elections and consequently drive up the widespread use of mail-in voting, it will be more than likely that we will see delays before we know the actual result of the presidential elections, possibly up to days. A study from PEW Research Center suggests that Democrats overwhelmingly (87%) favour allowing mail-in votes for every voter and strongly (67%) favour using this measure in comparison to Republicans who are mixed on it (49% and 50% respectively). As a result, the uncertainty is in the lead up of ballot counts on mail-in ballots, whether Trump will accept the outcome in the event where Trump leads the in-person count, before losing when mail-in ballots are tallied.

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This should have some impact on safe haven assets, adding to the already present upside pressure from the covid-19 pandemic and uncertainty of the presidential election outcome itself. Interestingly, polls and betting markets are contrasting each other, with polls showing that Joe Biden has a dominant lead in electoral college votes over Trump. While Biden's lead over Trump hasn't peaked as high as 2016 Democrat presidential election candidate Hilary Clinton's, his lead continues to be much more dominant as opposed to that of Clinton. On the other hand, election punters are pricing in a much closer presidential election despite odds widening again in favour of Biden after today's debate. It suggests that punters may be pricing in a possible upset in swing states to push Trump into a position to win 270 electoral college votes. This could be due to a possible vaccine, or a strong recovery in economic data, etc, most of which that appears to be unlikely at this point of time.

Betting markets suggests the punters are pricing in a higher likelihood of a potential Trump victory

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FiveThirtyEight’s election model suggests that polls indicates that Trump (red) only has a 22% chance of winning the elections

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This should become another point of concern for market participants, which may result in greater volatility in financial markets as a result. We've already seen a 10% correction in the S&P500 during the month, which means that downside may be starting to be limited. In the current environment, we expect the dollar to continue to face increased volatility as a hedge against the uncertain political landscape as investors exit and rebalance portfolios, meaning that there may be some upside for the greenback. We also do see additional upside for gold despite possible gains in the dollar as investors will likely see the precious metal as a better hedge against the political backdrop amid the pandemic. This is especially so with gold trending closer towards the lower end of its three-year valuation against the Nasdaq 100. Hence, gold may have additional room to rebound back higher above 1902.44 to 1980.23 and possibly above 2073.78 as we move closer to the US presidential elections. Volatility in the dollar could potentially drag the precious metal down closer towards 1,815.66, but we expect this downside to be limited due to external factors such as large levels of stimulus measures from the US government and the Fed. However, important to note is that a potential spike in the dollar due to reintroductions of lockdown measures in the US due to over capacity in hospitals with the upcoming flu season may result in greater downside risk for gold.

XAU/NDX suggests downside in gold in relation to the tech sector may be limited as it trades closer at the bottom end of the three-year chart

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Gold/SPX has erased nearly half of its gains since March

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Technical Analysis:

XAU/USD

Gold suffered another correction, after forming a triangle during August as equity markets rushed to liquidity during September. Then the last couple of days saw a slight recovery but also significant levels of market uncertainty as elections come into play. In our view gold fundamentals continue to skew in favour of the precious metal, which provide some upside or at least support in the short-term. However, a key indicator to watch is the 100-day moving average, which gold has still managed to stay above of, signalling that it the recent decline may still be mostly a correction after a sharp spike at the end of July. 

Support: 1849.39 / 1815.66 / 1760.22

Resistance: 1902.44 / 1980.23 / 2073.78

XAU/USD Chart (D1)

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