Tuesday November 8: Five things the markets are talking about
With the gap in U.S election polling still within the margin of statistical error, is the current risk rally in markets ahead of voting a little premature?
It fells like Brexit deja vu all over again for capital markets – limited upside (Clinton win), massive downside with a Clinton defeat.
Anybody who had bets on Brexit getting rejected would be advising caution at this time.
Yesterday, markets closed out with U.S equities trading up and the ‘mighty’ buck stronger on confidence in a Clinton win and the prospect of a Fed hike in December. This feel good feeling even managed to drag commodity bloc currencies along for the ride, while punishing bond and gold prices.
However, for now, just as the U.S populace go to the polls in a matter of hours, markets seem frozen in time. However, expect that to change, for ‘how long’ remains the million-dollar question.
If results in key states are clear-cut (NH, FL, NC, or NV), the media could begin to call the race as early 09:00pm EST, although the most recent previous three elections were called after 11:00pm EST.
The options market is pricing in ‘Hillary won, move along, nothing to see here.”
1. Global equities flat line ahead of polls opening
As dealers wait for the outcome of one of the most contentious U.S. presidential elections in history, current trading is been driven by a cautious market expectation of a win for Ms. Clinton.
In overnight trading, MSCI’s broadest index of APAC shares ex-Japan was up +0.6% and Japan’s Nikkei 225 was flat.
In Europe, Euro Stoxx has inched up +0.3% in morning trading, as market participants remain cautious ahead of the results. Banking stocks are trading generally lower, while energy stocks are trading higher on the back of Brent and WTI.
U.S futures are pointing to a flat’ish opening for Wall Street.
Indices: Stoxx50 +0.3% at 3,014, FTSE +0.2% at 6,817, DAX -0.1% at 10,449, CAC-40 +0.1% at 4,467, IBEX-35 -0.2% at 8,904, FTSE MIB -0.2% at 16,711, SMI +0.3% at 7,756, S&P 500 Futures -0.1%
2. Oil Prices little changed
Oil prices are attempting a rally ahead of the U.S open as some investors unwind a number of safe-haven bets on a Democratic win today.
Brent January crude oil futures are up +42c at +$46.57 per barrel, while U.S. West Texas Intermediate (WTI) crude futures are up +28c at +$45.17.
Note: both contracts are still down around approximately -4% w/w, but above last Friday’s monthly lows.
Once today’s U.S Presidential winner is declared, the markets focus will switch to OPEC.
The group meets on Nov. 30 and has pledged to reach a deal on cutting output to try to erode a two-year-old global surplus. The event risk is that a number of member states are asking to be exempt from any deal, along with questions over the likelihood of non-OPEC rival Russia joining in, is creating market doubts over their ability to deliver a meaningful cut in a few weeks.
Gold is up +0.2% at +$1,285 an ounce, after sliding just under -2% yesterday from this months intraday highs. The yellow metal rallied +2.3% last week as opinion polls indicated Clinton’s lead over Trump was narrowing.
3. U.S Treasuries back up a tad
Benchmark U.S 10-year note is little changed ahead of the U.S session, yielding +1.82%, down -1bps overnight.
U.S rates backed up +5bps yesterday as the market shied away from safe-haven assets on the pickup in expectations of a Clinton win paving the way for a possible Dec Fed hike.
Fixed-income dealers expect the U.S yield curve to continue to shift higher on a Clinton win (U.S 10’s to trade to +2%) and Fed rate “normalization.”
Currently, Fed fund futures are pricing in +80% possibility of a Fed hike.
Be aware, there is some Fed speak today, Fed Chicago President Evans is on roster at 07:45 EST.
4. Dollar edges lower on investor caution
It’s no surprise to see the mighty buck trade a tad under pressure this morning, giving up some of yesterday’s early gains as both dealers and investors move to the sidelines ahead of a “too close to call” election.
The ‘mighty’ dollar rallied Monday as a Clinton win looks on the cards. However, the U.K’s surprise Brexit vote outcome has left many wary of the potential risk of a Trump win – reason why many positions have been pared/neutral and waiting to be dispersed on final results as risk/reward not attractive enough.
The dollar index is trading down -0.1% ahead of the open stateside, with EUR/USD up +0.1% at €1.1050, USD/JPY steady at ¥104.52 and GBP/USD up +0.2% at £1.2420.
5. China Trade Surplus and Exports miss expectations
Data released overnight showed that China’s October exports fell -7.3% (-5.4% exp.) from a year earlier, the seventh consecutive monthly decline, while imports shrank -1.4%, the second consecutive monthly decline, and leaving the country with a trade surplus of +$49.06B (+$51.3B exp.) for the month.
Exports in the first 10-months fell -7.7% y/y, while imports dropped -7.5%.
Data like this will only add to ongoing worries about Chinese industrial overcapacity, regional house prices and the expansion of credit.