The Paramount Week for Global market events in CY24: Major Scenarios to Evaluate

As we stare at the most important week of 2024, in terms of global events, this note outlines key economic impact & possible scenarios for the markets in near future. US election outcome & series of events scheduled thereafter will keep most Central bank policy makers, Treasury heads & Fund managers engaged in evaluating different scenarios.

Even at the start of CY24, market participants had much-anticipated US Presidential election results marked on their calendar and volatilities got priced into all liquid asset class derivative instruments - be it currency, rate or equity. However, given the tightness of battle seeming like ‘dead heat’ & possible uncertainties those could emerge out of Trump win, bond market partially started pricing some of those scenarios during Oct.

A. What all already in price :

While forecasting market moves, as fund manager & corporate treasurer, we need to analyse and decipher what all are already in the price.

1.??‘Trump trade’ in US Treasury yields – UST 10Y yields spiked 70+ bps since Fed started 50 bps rate cut regime just 6 weeks back. No market data can explain this move. There were couple of stronger data prints on US jobs & consumption in Oct, but those can be attributed to only 10-12 bps UST yield rise.

Such large sell-off in US yields is primarily due to investors demand being weak before such critical election event & most funds sold their positions due to fear of ‘Trump trade uncertainty'. Even post release of 1st Nov NFP data, which was very soft with ‘hurricane excuse’, Treasury yields spiked by 13-15 bps across the curve.

2.??What is ‘Trump trade’ and post-Trump scenario – US bond market yields are reflecting fear of possible policy impacts of Trump 2.0 regime (higher fiscal deficit due to lower corporate tax, intensified tariff war with China & EU).

Even though it’s difficult to implement 100% pre-poll ‘Red’ agenda, broadly there is consensus on economic impact of Republican majority in the house – higher US inflation, slow global growth & less room for Fed rate cut. I foresee Dec 2025 terminal rate (‘Neutral rate’ after end of the cut cycle) to be ~ 3.5%, if there is change in Govt in the US this week.

US long-term growth, which also the barometer for UST yields & Dollar Index, should be stronger over 2-3 years period during Red regime. This is because the trade slow-down should get compensated by higher fiscal spending on local manufacturing & consumption. Trump would endeavor to replace most of Chinese imports with indigenous production and look for stable domestic growth.

3.??Chinese Reaction – China started reacting to Fed rate cut within 10 odd days, by announcing series of measures (including 50 bps RRR cut) in Sept last week, to stimulate growth. They have also been heavy sellers in US Treasury holdings during CY24. Market is fearing more aggressive Fiscal & Monetary policy measures from China in Nov, if Trump manages to win.

B. Line of events during Nov 1st week : Probable scenarios

1. Election results expected on 6th Nov during the day (India time) – Ultimately binary event for the markets, but in case of close finish & result declaration getting delayed, there will be few more days of volatility.

• Blue win – market will see this as the best-case outcome, as it will ensure continuity of current regime policies; with couple of added fiscal measures to support growth. UST 10Y yields should get relief rally back towards 4% handle and resultant rally in EM currency & equity assets.
• Red win – Only scenario, which market can’t price and induces knee-jerk sell off, is the ‘uncertainty’ in policies. Trump regime, if gets empowered with full force, will imply strong DXY currency, higher UST yields & huge outflows from EM markets. US equity markets will rally on shorter timeframe; but won’t be able to sustain the gains in long term, due to tariff war & high inflationary expectations.
• Tight finish & no clear majority – There is high probability of Republicans going to court & asking for re-counting, if they lose by fine margins. This will delay the final result but shouldn’t change the initial verdict. Narrow wins for either party could delay overall policy implementations & fiscal budget expansions. So, dead-heat poll outcome should lead to UST yields gradually coming lower towards 3.80-90 levels.

?2. FOMC rate decision on 7th Nov (2 pm EST) – FOMC is scheduled after election results with an unusual 7-week gap from Sept policy date. Nov FOMC should deliver 25 bps cut, as per market expectations. Fed is mostly uncomfortable with rising UST yields and should emphasize on ‘Front ending’ the cut cycle & revise CY25 rate cut forecasts.

Trump win scenario will of-course tie up Fed hands for future cuts & they would want to wait for further update on fiscal policy by the new Govt. FOMC outcome on 7th Nov could very well turn out to be Hawkish for rates market globally.

3. China NPC meeting announcements postponed till 8th Nov – China’s top legislature, NPC standing committee, was scheduled to announce the fiscal expansion plans early this week. They have postponed the meeting till 8th Nov to check US election outcome & wait for FOMC updates. They will anyways plan very aggressive growth boosting measures, in anticipation of & to counter possible tariffs imposed by the US.

China is committed towards 5% growth target for CY24 and is falling short as per Q3 numbers. There are continuous efforts on higher value-chain manufacturing and improving local consumption by Chinese authorities. Market will start pricing ~CNY 10trn Fiscal stimulus announcement this month, if there is Republican Govt in the US.?There will be growing expectation of CNY devaluation in the market, as natural counter for tariffs.

C. Likely impact on Indian Markets :

1. Currency –

• USD/INR will be more vulnerable with sharp depreciation moves in the event of ‘Red win’. China monetary policy reaction in Oct has already resulted $12 bn+ outflows from India financial markets (equity + debt). Trump regime and fear of restrictive trade policies from US & China would induce $50 bn+ incremental outflows from India markets by next 3-4 months.
• India was net recipient of $60 bn+ FPI flows during Jan ’23 to Sept ’24 period. This was in the backdrop of improving fundamentals (Low CAD, controlled CPI) & favourable global metrics like lower commodity prices (Crude correcting 25% from 1-year peak), relative strength in major EM currency basket & weakening DXY within tight range. This magnitude of supportive global environment during last couple of years should have kept INR currency towards its fair value zone of 81.00 – 81.50 against US$.
• If India wants to attract FPI & FDI flows over long term, then INR needs to reflect fair value of local & global macro data. Otherwise steadily depreciating INR will dis-incentivize any major foreign flow into the country. As foreign investor decision making in INR assets is based on 'real return' & 'currency return'.
• RBI Forex intervention strategy & continuous accumulation of US$ reserves have missed a very elementary economic point. Even during long period of hugely favourable macro & foreign flows, there was no room for INR appreciation. Such approach has only one outcome possible & range finally breaks on downside – sharp depreciation when flows reverse & fundamental macro data worsens.
• We had similar fall in INR exactly 2 years back from 79.5 to 82.5 (~4%) within 1-month timeframe. Basis above 'Red win' scenario & with related global events folding out, USD /INR has decent probability of depreciating in the direction of 86.7 – 87.2 band, by March - April ’25.
• ‘Blue win’ event can provide some reprieve to INR in short term, but the proposed 'Harris regime' could get moderated version of Trump Govt, with stricter policy on Chinese imports & high fiscal spending. So, over longer time-frame China policy reaction will continue to bring about FPI outflows from India and result in gradual INR fall towards 84.60 - 85.00 zone.

2. Equity – Trump win & subsequent policy making in the US could cause India equity to under-perform and could see deeper correction (Nifty fall by 10-12% till 22k levels and Midcap correcting by 25-30%). In terms of individual sectors, Banking / Financial & IT will have larger sell-off and Industrial Metals, Local consumption / FMCG will out-perform.

Harris win should be better outcome for India equity market, with Nifty moving in 23k – 25k range in near term.

3. Fixed Income & Banking Liquidity – 'Red win' scenario will induce further nervous moves in India bond market. Tracking pressure on INR currency & FPI outflows, India 10Y Gsec will witness selling till 6.90-95 range, while domestic demand from banks to support Gsec levels going ahead. State Govt bond & corporate bond yields should move up higher by 15-20 bps, resulting IGB – SGB – CB spreads to widen. ?

Further, banking system liquidity will add to permanent deficit of INR 2.5 - 3.0 trillion due to Forex outflows & consequent USD selling by RBI till March'25.

RBI MPC decision in Oct to change stance was majorly driven by global factors and monetary policy measures announced in the US & China. Market will expect further measures from RBI on liquidity (OMO purchase, CRR cut) & rate, if the feared 'trade war' events materialise between US & China. Gsec sell-off could intensify, in case there is continued stimulus measure from China and lack of policy response from RBI.

On the contrary, 'Blue win' should bring relief rally of 10-12 bps in Gsec & corporate bonds.

4. Commodities – Oil demand will continue to be subdued and fundamentally weaker global growth under Trump regime should keep Brent moving towards $60-65 / bbl in next 8-10 months. Further. Trump's added impetus of increasing US Oil production - 'Dig Baby Dig' as per red campaign, will add to global fossil fuel supply.

Precious metals & Industrial metals will outperform in next couple of quarters, given China’s continued push for 5%+ GDP growth and pace of EV capex execution. Gold and BTC (Bitcoin) deserves special mention and should see 15-25% rally from current levels by next year, because of higher inflation outlook & increased risk appetite respectively.

D. Summary Table - Broad estimates of US & India Market Reaction :

Summary of the Blue vs Red scenarios are presented to estimate impact on major asset classes.

LinkedIn News India || BW CFO World || Mint || BW Businessworld || Financial Times

#USElections #TrumpTrade #USTreasury #IndiaRates #DXY #INRCurrency #BondMarket #EquityMarket #DebtCapitalMarket #FundManagement #FundRaising #CurrencyHedging #TreasuryLeader #CFOInsights #TopTreasuries #GlobalMarkets