US election is affecting not only US stock market volatility

Outlook:

We have a slew of US data today but nothing that turns on the FX crowd—the trade balance (August), inventories, Case-Shiller for months ago, and Conference Board consumer confidence. The event of the day doesn't come until after the close—the first presidential debate.

The FT reports the US election is affecting not only US stock market volatility, but also the VIX equivalent for the EuroStoxx. See the chart. The biggest risk is a disputed election that can drag on for weeks and need a Supreme Court decision—a Supreme Court newly populated with a justice Trump appointed only weeks before and the Senate will have approved only days before.

Unless Biden wins in a landslide of in-person voting and maybe not even then, Trump is definitely going to contest the election. Why anyone is talking about it as a risk and not a certainty is unclear. For one thing, he needs to stay in office to avoid prosecution. For another, nobody will foreclose on his properties listed as collateral as long as he is a sitting president. Besides, he is collecting money for his own pocket by various parties trying to curry favor by using his resorts and hotels. This violates the emoluments clause, but again, he is immune from prosecution as long as he is in office.

The high probability bordering on certainty that Trump will contest the election is likely to get built in over the next 34 days and may not freak out the equity world when it actually happens. How upcoming events get built in to securities prices (or not) is something we know all too little about, "surprise indices" notwithstanding.

We see the same kind of confusion in the Brexit talks. One little ray of light and bingo, sterling rallies, when we all know and have known for a very long time that the prospect of a proper deal is very, very small. Then there's the pandemic, blithely ignored by the US equity markets except in specifically, directly relevant sectors (pharma, airlines/hotels). The S&P's divorce from reality has been commented on at length, but persists anyway. One thing we do know—the stock market will rally when it's over, no matter who gets to occupy the White House.

What about the immediate outlook for the dollar? The current corrective pullback looks completely normal on the charts. We get pullbacks after 5-8 days of a robust move. If the pullback is minor (25-35%),the pre-existing move resumes with little fuss. If the pullback is major (50-65%), we get a consolidation phase of sideways, rangey moves that confuse the hell out of everybody.

Sometimes we get rangey moves from minor pullback and a decisive, V-shaped recovery from a major one, depending on conditions. But that's not the norm.

This time we expect the pullback to last very little longer, probably not past the end of this week, on the grounds that it's based on technicals and positioning, not anything fundamental. As noted above, we see resistance on the upside of the euro ar around 1.1810. The AUD has a cap around 0.7120. What can upset this apple cart is sterling, which is unpredictable and bleeds into crosses and moves like slime mold into weird places like the EUR/JPY where you'd think it has no place.

In other words, we expect the dollar to recover. But watch that pinball pound.

Politics: Trump is a draft dodger and a tax dodger. "Tax dodger" is Biden's latest comeback to Trump's personal attacks on him. In tonight's debate, the first of three, we are relying on Chris Wallace to interrupt with a fact check when Trump lies. What he will do about Trump's personal attacks on Biden and his son remains to be seen. Biden said yesterday he expects a personal attack because that's all Trump knows how to do—"he doesn't know facts." Well, neither does the Trump base.

Still, Biden got a great gift in the form of the tax disclosures. It's not on the formal agenda but Biden is sure to get it in. Experts say they can't identify for sure what's criminal without the underlying documents, but we have plenty without the criminal part. As noted yesterday, to whom does Trump owe that $421 million in the next few years? It might be a Russian oligarch or bank. Does the public have a right to know? American public, yes. Europeans, too. Another question is which is correct, the $430 million he claimed in income on the official presidential candidate disclosure statement or the $47 million loss he claimed to the IRS in the same year?

As for the Republicans jamming through a severe conservative to the Supreme Court, we can relax. The job of a court is to apply the law and interpret it under certain circumstances. Congress can just write new laws to overcome a Supreme Court bias to be behind the times. The Constitution specifically allows amendments and other changes down the legal food chain in order to stay with the times. The new justice-to-be says she interprets the law without consideration for what the public prefers. So, change the law to get what the public prefers and she will be duty-bound to rule accordingly.

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