• The recent U.S. presidential debate between Kamala Harris and Donald Trump has caused global market fluctuations.
• The lack of clarity from the debate has left investors uncertain, affecting Asian equities, U.S. stock futures, and the dollar.
• The late entry of Harris into the race has prompted a reversal of trades, with betting markets swinging in her favor.
• The market volatility is reminiscent of the 2016 U.S. presidential election, but the long-term outlook remains positive.

The aftermath of the recent U.S. presidential debate has sent ripples through global markets. The contentious face-off between Vice President Kamala Harris and Republican Donald Trump has left investors on edge, leading to a slip in Asian equities and U.S. stock futures. The dollar, too, has found itself on the back foot, with the yen rising over 1% to eight-month highs.

The debate, the first of its kind, saw the presidential hopefuls spar over a range of issues, including abortion, the economy, immigration, and Trump's legal woes. The lack of clarity and the combative nature of the debate have left investors skittish, particularly with the impending release of U.S. inflation data that could influence the Federal Reserve's policy moves in the coming week.

The MSCI's broadest index of Asia-Pacific shares outside Japan dropped 0.3%, while S&P 500 futures eased 0.5%. The dollar found itself on the defensive, with the yen rising over 1% to eight-month highs. European stock markets were also set for a soft open, with Eurostoxx 50 futures 0.19% lower, German DAX futures little changed, and FTSE futures down 0.17%.

Market Reaction and Investor Sentiment

The late entry of Harris into the presidential race, following President Joe Biden's withdrawal in July, has tightened the race. This unexpected turn of events has prompted a reversal of trades that were put in place on expectations of a second Trump presidency. Investors are now focusing on the fiscal policies and plans for the economy from the candidates. However, the debate was light on specific details, leaving investors in a state of uncertainty.

Despite the lack of specifics, betting markets swung in Harris' favour after the event. Pop megastar Taylor Swift also announced her support for Harris in the upcoming Nov. 5 election, providing a boost to the Harris campaign. Chris Weston, head of research at Pepperstone, noted, With the dust settling on the Trump vs Harris presidential debate, it's clear that the market saw this debate going to Kamala Harris.

The dollar index, which measures the U.S. currency against six peers, was down 0.3% at 101.34, with the yield on the benchmark U.S. 10-year Treasury note easing 2.4 basis points to 3.62%. Rob Carnell, ING's regional head of research for Asia-Pacific, suggested that the market's reaction indicated a lean towards Harris. He said, You'd expect if he (Trump) was doing better, that you'd see a strong dollar coming out of this. So I suppose that's the way the market is looking at it. It's a slight lean towards Harris.

Asian Markets and the CPI Report

Asian markets also felt the impact of the debate. Japan's Nikkei sank nearly 2%, while Chinese stocks fell again. The Shanghai Composite index was 0.92% lower, while the blue-chip index eased 0.46%. Hong Kong's Hang Seng index slipped 1.4%.

Investor focus is now shifting to the U.S. Labor Department's consumer price index (CPI) report, due for release later on Wednesday. The Federal Reserve has made it clear that employment has taken on a greater focus than inflation, but the CPI report is still crucial for policy clues. The headline CPI is expected to have risen 0.2% on a month-on-month basis in August, unchanged from the previous month.

While the Fed is widely expected to cut interest rates next week, the size of the rate cut is still up for debate. A mixed labour report on Friday failed to provide clarity on which way the central bank could go. ING's Carnell noted, What we needed to see to spur the Fed into greater action would be much more obvious evidence of slowdown/recession, and in particular in the labour market. And I don't think we saw that in the last payrolls report.

Markets are currently pricing in a 65% chance of the U.S. central bank cutting rates by 25 basis points, while a 35% chance is ascribed for a 50 bp cut when the Fed delivers its decision on Sept. 18, according to the CME FedWatch tool.

The dollar remained defensive, with the yen strengthening more than 1% to 140.71 per dollar, the highest since late December. The yen was also boosted by comments from Bank of Japan board member Junko Nakagawa, who reiterated in a speech that the central bank would continue to raise interest rates if the economy and inflation move in line with its forecasts.

In commodities, oil prices stabilised on Wednesday after dropping over 3% in the previous session, but still hovered near their lowest in three years after OPEC+ revised down its demand forecast for this year and 2025. Brent crude futures were last 0.43% higher at $69.49 a barrel, while U.S. West Texas Intermediate (WTI) crude rose 0.46% to $66.03 a barrel.