Dialling down risk exposure as prediction markets crank up the suspense

With a hotly contested U.S. election on the horizon, traders across markets are dialling down risk and gearing up for a rollercoaster of volatility in anticipation of the triple threat that looms: the election showdown, earnings season, and an imminent Federal Reserve rate decision. The face-off between Kamala Harris and Donald Trump has become a true toss-up, leaving traders to de-risk and prepare for turbulence.

This high-stakes week is setting the stage for potential market fireworks. As the clock ticks down to Election Day, expect this tightening race to keep markets on edge, with every new poll and economic signal scrutinized for clues. If volatility were bottled, this week might be the uncorking.

Prediction markets have cranked up the suspense for the 2024 U.S. Presidential race, with odds tightening dramatically over the past week and some intriguing shifts surfacing over the weekend. While former President Trump remains the frontrunner, his odds have been pared back from October’s highs across platforms like Polymarket, PredictIt, and Kalshi. The spark behind these shifts? A high-impact poll from legendary pollster Ann Selzer, revealing Kamala Harris taking a surprising 3-point lead in Iowa—a state Trump handily claimed in both 2016 and 2020.

 The poll highlights a wave of support from women, particularly older and independent voters, nudging the momentum towards Harris. Still, prediction models from the likes of FiveThirtyEight are calling this election a virtual coin-toss with a slight edge for Trump, though they acknowledge that Selzer’s insights could be a bellwether, especially if the female vote has been underestimated.

While the spotlight’s squarely on the U.S. election drama, broader economic cues are still in play. Friday’s U.S. Non-Farm Payrolls and ISM Manufacturing numbers delivered a lacklustre performance, though one-off factors like hurricane disruptions and the recent Boeing strike skewed some results. Even so, the modest 12k rise in NFP—excluding a 44k drop from the strike and hurricane impact—hints at a softening trend in the U.S. labor market. Given this backdrop, a 25bps rate cut by the Fed this week seems all but locked in, though the election outcome could significantly shape the Fed’s strategy beyond 2024.

In Asian FX markets, a reprieve arrived in the form of a weakened dollar, pushing USDCNH below 7.11. With markets whipsawing on both election and economic news, the week ahead promises plenty of excitement—and volatility—as we wait for the results of this razor-thin race to unfold.