Morning Update: Biden Steps Down, Election Odds Change, China Reduces

Market Jitters Amid Biden's Exit and Tech Volatility

The announcement of U.S. President Joe Biden's withdrawal from the White House race didn't come as a major surprise, yet it has injected some uncertainty into the financial markets. Previously, market sentiment indicated Republican challenger Donald Trump as the clear favorite for the November election. This development emerged after a tumultuous period for Wall Street, which saw its largest weekly loss since April as tech giants kicked off the second-quarter reporting season with setbacks, bringing volatility back to the forefront.

The anticipation surrounding the presidential race tightened on Monday, with so-called "Trump trades" being trimmed. Marginal changes were noticed in the market—a dip in long-term Treasury yields and the dollar, a rise in Mexico's peso, slightly higher stock futures, and the VIX volatility gauge maintaining its three-month high from the previous week.

Global Market Influences

The international landscape also influenced market dynamics. An unexpected interest rate cut from the People's Bank of China on Monday weakened the yuan to its lowest in over two weeks. In the tech sector, which was already reeling from an investor shift to small caps and a global computing outage, the focus is now on upcoming earnings reports from giants like Alphabet and Tesla.

Biden's Departure and Harris's New Position

Biden's withdrawal has shifted attention to who will replace him as the Democratic nominee, with his endorsement of Vice President Kamala Harris putting her as the frontrunner ahead of next month's Democratic convention. Betting markets, which can influence investor sentiment, had been distorted due to Biden's uncertain position. Now, with Harris poised to take the lead, the odds appear more balanced. Although Trump remains the favorite, his probability of winning has decreased from over 70% to around 60%. PredictIt betting site has placed Harris at about 40%, even though she hasn't officially secured the nomination or campaigned for it yet. Her pick for a running mate will also become a focal point if she is nominated.

Impact on Federal Reserve Decisions

The tightening race may slightly affect futures markets' expectations for the Federal Reserve's anticipated interest rate cut in September. While the Fed maintains that its monetary policy decisions are independent of the election cycle, some investors had perceived a pre-election rate cut as more feasible given Trump's previously strong odds. This calculation may now waver marginally.

Busy Week Ahead

Markets have a packed schedule this week. Aside from major earnings reports, the release of the Fed's favored PCE inflation gauge for June on Friday will be closely watched. Additionally, flash business surveys for July from around the globe and a heavy roster of Treasury sales are expected. In Europe, bank earnings will be a highlight, with major banks like Deutsche Bank, Lloyds, BNP Paribas, Santander, and UniCredit reporting midweek.

Nvidia's Strategic Moves

On Wall Street, Nvidia saw a 1.3% rise following reports that the company is developing a version of its new flagship AI chips for the Chinese market in compliance with current U.S. export controls.

Key Events Influencing Markets

Several key developments will provide direction to U.S. markets later on Monday. These include the Chicago Federal Reserve's June economic activity index, U.S. corporate earnings from companies such as Verizon, Truist Financial, WR Berkley, Nucor, NXP Semiconductors, IQVIA, Cadence Design Systems, and Alexandria Real Estate. Additionally, the G20 Finance Ministers and Central Bank Governors meeting in Rio de Janeiro, speeches from New York Federal Reserve President John Williams and Atlanta Fed President Raphael Bostic, and U.S. Treasury auctions for 3- and 6-month bills are on the agenda.