JPY tends to rise and indices fall the Friday before a US election

A less-dovish BOJ may have strengthened the yen while weak tech earnings weighed on Wall Street Thursday, but these patters could persist on Friday if they follow their usual pre-election path looking, according to historical data.

The table below shows the average daily percentage returns of markets over the past nine elections (although data limitations means US index futures are limited to six). Still, three clear patterns emerge on how they perform on the Friday before an election.

1. US and APAC indices tend to fall
2. European indices tend to rise
3. The yen strengthens

And this mostly makes sense, as investors presumably feel inclined to either square up their books, take profits or hedge ahead of the weekend before the US election. And with election nerves clearly in the air once more, me could find the pattern repeats today. For whatever reason, Europe feels the need to bid into the weekend. But it is what it is.

But it would appear these patterns have arrived a day early this year, and with gusto.

Sentiment rocked ahead of the weekend, election jitters alive an well.

The Bank of Japan held policy as expected, but its less-dovish tone opens the door for a hike sooner than later. BOJ governor Ueda’s comment that US risks were receding was taken as the green light that the volatile conditions which placed their hawkish stance on hold may have passed. The yen was broadly higher against all FX majors, sending USD/JPY down to a 4-day low around 152. EUR/JPY formed a bearish engulfing day and AUD/JPY saw an intraday break beneath 100 (a level it is narrowly to hold above at the time of writing).  

Tech stock led Wall Street lower with Meta Platforms and Microsoft weighing heavily on the sector, despite Amazon and Apple posting quarterly revenue beats. But it also may have been the straw that broke the camel’s back, as Wall Street indices were already teetering on the edge with election jitters.

Nasdaq 100 futures were nearly 2.5% lower and S&P 500 futures off nearly 2% during their worst day in eight weeks. The Nasdaq is clinging to 20k a level I suspect will be pivotal heading into the weekend. Dow Jones futures closed beneath the August high, while ASX 200 futures (SPI 200) appears to have confirmed a head and shoulders top. If successful, it projects a bearish target around 7900.

With sentiment on the ropes, traders bidding the yen post BOJ and the currency open to safe-haven flows, we could see an extension of Thursday’s moves. Even if to a lesser extent.

AUD/JPY: Forward returns around a US election

• Negative average and median returns at T-2 (Friday)
• T-2 also has a negative skew, falling 7 out of the past 9 data points
• Average daily range is 1.7% (1% median)
• Volatility tends to diminish on Monday
• Then rise to an average of 2.2% on election day (1.3% median) and 2.4% on Wednesday (1.5% median)

USD/JPY: Forward returns around a US election

• Negative average returns of -0.13% but positive median returns of 0.03% at T-2 (Friday)
• This makes the signal much less clear for Friday’s, potentially as both USD and JPY can be treated as safe havens
• T-2 only has a slightly negative skew, falling 5 out of the past 9 data points
• Average daily range is 1.1% (0.7% median)
• Volatility tends to diminish on Monday
• Then rise to an average of 1.6% on Wednesday day (1.1% median as the results pour in)

Events in focus (AEDT):

• 08:45 - NZ building consents
• 09:00 – AU manufacturing PMI
• 11:30 – AU PPI, building approvals, home loans
• 11:30 – JP manufacturing PMI
• 12:45 – CN manufacturing PMI (Caixin)
• 18:30 – CH PCI
• 23:30 – US Nonfarm payrolls
• 01:00 – ISM manufacturing

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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