While the impending US election vote is continuing to drive all headline attention, the FTSE 100 concluded the week losing over 1.4% and dipping below the psychological 7000 milestone level as a result of the British Pound surging higher following optimism that the UK Government have hit a wall following the recent High Court ruling in their attempts at speeding up the UK’s exit from the European Union.
With the High Court ruling that the process of exiting the European Union can’t begin with the vote of Parliament, previous concerns that the UK was going to be led to a “Hard Brexit” from Prime Minister Theresa May have been dashed to the side for now. I still expect buying interest in the Pound to be subdued as the ruling simply puts the brakes on the previous concerns that the UK Government would rush ahead to leave the EU, but the indications that the divorce is not being accelerated is providing support to the UK currency.
What I personally find interesting when monitoring the investor reaction to this news, is that it is becoming clearer and clearer that the FTSE 100 and British Pound are mirroring each other’s movements in an opposite direction in the same way we have experienced in the Nikkei and Japanese Yen for years. The High Court ruling should actually be seen as a positive for the UK economy, and as such for the FTSE 100 but investors are driven in the modern era by different types of yields and it looks like the FTSE 100 and British Pound are being hedged against each other.
WTI Oil below $45
We can call this going full circle. The price of WTI Oil has now returned below the levels of the shock at a preliminary agreement being reached nearly two months ago, as a result of a lack of confirmation that OPEC will confirm a change in production this month. Investors have now taken all profits off the table when it comes to Oil, and the credibility of the OPEC Committee is being called into question as a result of the ongoing lack of clarity over whether there will be a change in production output this month.
These losses for the Oil markets are getting more and more violent, we might even be at risk to entering another bear market. The situation with OPEC is to be polite, just confusing and a failure to carry through with the previously announced preliminary cut will likely continue to alert sellers to drive the commodity even lower down the charts.
Despite the aggressive selling, there is still some faint optimism that OPEC will be able to set an output quota at its next meeting and confirmation of this is needed to bring investor attraction back towards oil.
FBI U-turn to encourage market rebound?
The major news as we head into an historical week is that Federal Bureau of Investigation (FBI) Director James Comey has stated that a review of new evidence provides no reason to change its earlier decision that Hilary Clinton should not face charges related to the use of her private email server. This has provided encouragement for the markets to begin a rebound away from the losses last week, most noticeably resulting with the Dollar charging higher across the FX markets.
Investors might be tempted to price this news as encouragement that Hilary Clinton will be declared as victorious and this why the markets are expected to continue pointing higher as trading gets underway in other trading sessions on Monday.
I would personally add that this news does not confirm that Clinton will win, and there be a risk that some damage has been done to credibility following this ongoing drama being in the headlines for such a long time and with voters probably deciding already who they will elect as the new US President. Either way, I am expecting further swings for the markets with this possibly being in either direction until the outcome of the US election is confirmed.
USDCNH resumes gains
The Chinese Yuan has been one of the biggest losers from the resumption in Dollar strength overnight following the news from the FBI over Hilary Clinton. The USDCNH appears on its way to returning to milestone highs close to 6.80 at the time of writing.
The Australian dollar has jumped higher again on the back of USD weakness, as non-farm payroll data was much weaker than expected coming in at 161K. But the main feature that has been disrupting the market is the US election with many worried about the likely outcome of the election over Trump vs Hillary. So far many have been calling for a Hillary win, but many are concerned that a number of Trump supports have not admitted to polls that they will indeed vote for Trump. The likelihood for the markets is a drop in the USD if Trump is elected, or a rise for the market if Hillary is elected. Back in Australia though things have been a little different, with retail sales beating estimates in the previous week to 0.6% (0.4% exp). However unemployment continues to be an issue with full time jobs losing ground over temporary ones, and now some analysts are expecting two rate cuts in 2017 if the data does not improve. I believe this is very much likely on the basis that does not seem to be improving, and also that the AUD continues to be a painful topic for Australian exports, as fixed interest investors continue to hunt for yield in the repressed market.
The AUDUSD has risen high on the charts in recent days and has touched on a strong level of resistance at 0.7730 and has started to slip backwards, however this wave forward goes against the recent bearish trend and for me is a bullish signal with profit taking at this level of resistance. Going forward a pull back to support at 0.7695 looks like a strong possibility before a push higher in the face of non-action from the Reserve Bank of Australia. Further resistance levels though above 0.7730 can be found at 0.7754 and 0.7791.
Oil has found itself under technical pressure in the market after the recent pressures caused by surpluses appearing in the US market after last week's came in strongly at 14.42M (1.51M exp). This in turn has caused a run on the oil market which has seen the bears take complete control and look to push it much lower than previously expected. With OPEC still struggling with infighting and lack of direction, it looks all the more likely that this will be drawn out for some time when it comes to cutting back on production. I would anticipate that some deal will be struck, but the timeframes around it are some time off.
Oil does like to bounce and support at 43.47 was all the market needed to do exactly that, with traders looking to find the floor in the market and hitting it square on. With that drop the bulls have looked to regain some control but resistance at 46.19 seems a little far off, and the reality of surpluses and aggressive oil traders is that the bears are likely to come back in swinging, it's more likely they are waiting to trade of the result of the US election in the next few days.
FBI intervention ends nine days losing streak, markets pricing Clinton victory
Risks assets received a boost on Monday after the FBI announced it will not change the conclusion it reached in July after investigating Hillary Clinton's new emails.
The S&P 500 reacted as if a Clinton win looks more certain, surging by more than 2% and ending 9 days losing streak, its longest in more than three and a half decades. The Mexican peso led the rally in currencies, while safe-haven bonds and gold were dumped with the market’s fear gauge VIX index.
There’s no doubt that financial markets and businesses are hoping for a Clinton win with latest polls supporting this outcome, however in a year full of surprises I will be reluctant to take big positions and would rather hedge against the unknown especially that a Clinton win is priced in to some extent. We shouldn’t forget that the Pound traded at 1.5 against the dollar on the day of the Brexit referendum.
Whether Clinton or Trump wins the election, the longer-term impact will be decided by who rules the Senate and the House. Both the House and Senate are currently controlled by Republicans, and according to FiveThirtyEight the Democrats have 68.9% chance of recapturing the Senate. Markets best case scenario should be a continued congressional gridlock which makes it difficult for the president to pass new legislations.
With almost 24 hours remaining to the election results, investors today seem to sit on the sidelines. The U.S. dollar is moving in a very narrow range and Asian equities are flat.
Earlier today, data from China showed that both imports and exports shrank for the second straight month in October, leaving the country with $49.06 billion trade surplus. Overseas shipments dropped 7.3% year-on-year indicating that global demand for Chinese goods remained sluggish especially from Europe where exports slid 8.7%. The Yuan depreciation was not enough to offset weak global growth and Chinese officials are left with little options to meet their growth targets, however I believe that the Yuan will continue to depreciate against the dollar but in a slow pace to prevent big shocks like the ones seen in the beginning of 2016.
The music of Trump leading resulted in investor shock
Recent history has once again repeated itself, and by this I mean that investors were caught completely off guard by not pricing in the reasonable possibility that Donald Trump could become the President of the United States. This is the exact same thing that happened during the EU referendum vote, when investors sided substantially towards pricing in a remain outcome and they were left in complete shock earlier in trading as a result of Donald Trump gaining momentum.
The beat to the drum of music that Donald Trump could win this election has got louder, resulting in chaos throughout the financial markets as a result of investor uncertainty. The markets crashed earlier in Asia trading with investors transitioning to full-on “risk off” mode as a result of the shock of Trump going into the lead.
So what has happened in the markets?
Investors moved into complete “risk off” mode with major stock markets crashing, including the Dow Jones Index losing over 600 points at one point. A period of “risk off” is bad news for the stock markets and Trump momentum is seen as dangerous news for the stock markets. It must be pointed out to investors that Donald Trump has not won the election at this point and Clinton has now taken the lead in dramatic fashion, although the markets did crash earlier in Asia as a result of investor shock.
“Risk off” basically means investor appetite towards riskier assets is diminished, meaning a massive negative for emerging market currencies. Both the Mexican Peso and Chinese Yuan weakened to record levels against the Dollar during trading so far in Asia. Why the Peso? Donald Trump is clearly anti-Mexico and Trump winning is seen as extremely bad news for the Mexican economy with this resulting in the Peso nosedive as a result of Trump momentum.
While Donald Trump has also displayed some very negative views on China in the past, as he has done with a multitude of other matters to be honest, it is possible that the swing towards Trump did contribute towards the offshore Renminbi hitting another record-low against the Dollar. The USDCNH crashed through 6.80 but suddenly pulled back to 6.76 within minutes, before later consolidating around 6.79.
This move was probably manipulated by election nerves sending investors flying away from riskier assets, but we can’t rule out the possibility that the People’s Bank of China (PBoC) might have pushed the buzzer to intervene and protect the Yuan from further losses as it reached 6.80. This is by no means confirmed, but it is one of the options that we can’t rule out of the equation.
The price of Oil has been another loser to the previous sudden twist of momentum towards Donald Trump. While this hasn’t been touched upon very much, Trump winning would have negative consequences on the price of oil. Forget about the ongoing OPEC drama, the threat of growth forecasts being downgraded at least over the short-term due to investor uncertainty in theory weakens demand for commodities like oil.
So who are traders currently favoring?
It has been proven time and time again that when there is uncertainty in the markets that the Japanese Yen proves itself as a best friend to investors and this is happening once again. The Bank of Japan (BoJ) will be in complete dismay if Trump pulls this off because it is going to send the USDJPY towards gravity, after already pulling back from 105 to just below 102 during trading in Asia this morning.
Safe-haven appeal for Gold is also being driven through the roof with the precious metal rallying from just above $1265 to marginally above $1320 on investor uncertainty.
Risk aversion swept across the financial markets during early trading on Wednesday after the unexpected Trump presidential victory soured investor risk appetite. Global sentiment was dealt a frightening blow with most major stocks sold off savagely as uncertainty repelled investors from riskier assets. The polls pointing to a Clinton victory were completely wrong, consequently catching participants off guard and this may come at a heavy price moving forward. With risk-off sentiment amid the Trump victory becoming a dominant theme across the board, stock markets could be left depressed for prolonged periods.
The S&P 500 futures have already slumped by as much as 5% following Trump's victory with the bearish contagion dragging European stocks 2% lower on Wednesday. Wall Street may be contaminated by the negativity with further declines expected in the coming days as the toxic combination of uncertainty and sliding oil prices provide a foundation for bears to install repeated rounds of selling. There is a strong possibility that today’s presidential results spark a fresh era of risk aversion with investors turning to safe-haven assets for protection against the pending chaos.
What a Trump victory means…
Uncertainty and Donald Trump seem to have a symbiotic relationship and this continues to weigh heavily on global sentiment. Concerns remain elevated over Trump potentially triggering a global and political disruption in a fragile financial landscape that is already entangled in a losing battle with investor anxiety. The persistent threats from Trump to discard major trade agreements have kept participants on edge, while his anti-Mexico rhetoric continues to pressure both the Peso and Mexican economy. Emerging markets may be in store for a nasty surprise moving forward as risk-off encourages another brutal selloff. Many questions remain unanswered in this sensitive period of uncertainty with more explosive movements expected as markets attempt to digest the Trump reality.
Dollar bears rampage
The Dollar experienced heavy losses during early trading on Wednesday with the Dollar Index sinking to the lows of 95.91 following the unexpected Trump presidential victory. Dollar weakness may be a recurrent theme moving forward as the awful combination of uncertainty and heightened concerns over the future of the US economy entices sellers to attack incessantly. In the aftermath of Trump’s victory, expectations have already diminished over the Federal Reserve raising US interest rates in December with the current odds below 50% which should pressure prices further. Despite the sharp rebound, which has taken the Dollar Index back towards 97.65 as of writing, bears remain in control with the Index sinking towards 96.00 as speculators reduce bets on a US rate hike.
Sterling scheduled for further declines
Sterling bulls received false encouragement on Wednesday with the GBPUSD lurching towards 1.2545 on the back of Dollar weakness. This technical correction simply provided a fresh opportunity for bears to install repeated rounds of selling on a currency that is heavily poisoned by hard Brexit fears. Previous talks of the high court announcing that the Brexit cannot proceed without the vote to Parliament did little to keep Sterling buoyed with further losses expected as investors come to term with the Brexit reality. The GBPUSD could be poised for steeper declines once bears conquer the 1.2350 support. From a technical standpoint, a breakdown below 1.2350 could open a path towards 1.2200.
WTI pressured by risk-off
WTI Oil fell below $44 on Wednesday as Donald Trump’s unexpected victory in the U.S presidential election sparked a wave of risk aversion. Oil prices were already pressured by the fading expectations towards OPEC securing a freeze deal in November’s meeting with this period of risk-off ensuring the commodity remains depressed. The amalgamation of oversupply woes and mounting concerns over demand diminishing amid slowing global growth could guide WTI crude back below $43. Some attention may be directed towards the pending crude oil inventories report which could send oil lower if there is a buildup in inventories.
Commodity spotlight – Gold
Gold surged with ferocity on Wednesday as Trump’s victory triggered risk aversion which encouraged investors to frantically pile into safe-haven assets. Markets have been flooded with renewed uncertainty consequently bolstering Gold’s allure. Dollar’s weakness amid dimming US rate hike expectations always played a key part which saw Gold prices clipping the highs of $1337. Buyers could be back in town with further gains expected as the mixture of Dollar weakness and uncertainty attracts investors to safe haven assets. From a technical standpoint, Gold is bullish on the daily timeframe as there have been consistently higher highs and higher lows. A breakout and decisive close above $1308 could encourage a further incline towards $1320.
Global stocks staged an awe-inspiring rebound during late trading on Wednesday as investors came to terms with the shocking Trump presidential victory. Asian shares rallied in the early sessions of Thursday with the Nikkei lurching close to 7% as participants re-evaluated the global impacts of Donald Trump’s severely mispriced election win. European markets may receive a welcome boost from Asia’s bullish momentum and the positive domino effect could support Wall Street later today. Although the short-term gains in stocks are impressive, investors should keep diligent especially when markets have been infected by jitters. Stocks remain depressed in the medium term with steeper declines expected as uncertainty grips risk sentiment.
Dollar bulls relentless…
The Dollar appreciated with aggression on Wednesday afternoon following Donald Trump’s presidential speech which effectively eased some concerns over his economic policies. Pledges of massive U.S fiscal spending have heightened expectations of Trump implementing fiscal stimulus measures, including tax cuts which may bolster profit growth consequently boosting inflation. Dollars resurgence was also complimented by the renewed speculations of the Federal Reserve raising US interest rates in December that encouraged buyers to attack. This week’s aggressive Dollar rebound may be fully Trump driven with more time needed for the Greenback to find some normality.
Some attention may be directed towards Thursday’s unemployment claims report which may reinforce some expectations of a December rate increase if unemployment claims recede.
WTI bears eye $44.00
WTI Oil lurched towards $45.92 during late trading on Wednesday as markets embraced the Trump reality. This feeling was short lived on Thursday when prices sunk back towards $45 following the ongoing oversupply fears that haunted investor attraction. Oil continues to be dogged by persistent oversupply concerns while fears over slowing global growth have sparked discussions of a potential decline in demand. This terrible combination of oversupply anxieties and tepid demand concerns may be the ingredients needed for sellers to send WTI back below $40. Investors have clearly maintained a cautious stance ahead of the November 30th pending OPEC meeting with expectations periodically diminishing over a successful freeze deal. From a technical standpoint bears need to conquer $44 for a further decline towards $43.
Currency spotlight – EURUSD
The EURUSD was explosively volatile on Wednesday with prices whipsawing within a near 400 pip trading range and the culprit was a chaotic Dollar. With the Greenback potentially strengthening further amid renewed US rate hike expectations, the EURUSD could be exposed to steeper losses as bears install repeated rounds of selling. From a technical standpoint, prices have turned extremely bearish on the daily timeframe as the candlesticks are trading below both the 20 and 200 SMA. A decisive breakdown below 1.0900 could encourage a further selloff towards 1.0850 and potentially lower.
Commodity spotlight – Gold
The erratic movements Gold dished out on Wednesday was out of character with most investors left bewildered as the precious metal surged over $60 before crashing back down. Risk aversion amid the uncertainty should clearly support Gold but market sensitivity continues to direct investors to riskier assets consequently leaving the zero-yielding metal vulnerable to losses. Gold may maintain ground in the new trading week as participants reassess the conditions of the global financial landscape. From a technical standpoint, bulls must break back above $1285 for a further incline towards $1308.
The emerging market currency sell-off has accelerated throughout trading in Asia on Friday, including the Indonesian Rupiah sinking to levels that prompted the Bank Indonesia (BI) to intervene and stabilise the market. While the Indonesian Rupiah has so far led the headlines after a plunge in currency value, the Malaysian Ringgit has also suffered from an extreme round of weakness and the offshore Chinese Yuan looks set to continue its course of hitting further historic lows against the Dollar.
While the declines seen in Asian currencies are being linked to the impact of trade throughout the continent if Donald Trump enforces protectionist trade policies, the return of expectations that the Federal Reserve will still raise US interest rates in December is strengthening the Dollar and also pressuring the emerging market currencies. If the Federal Reserve do not raise US interest rates in December as they have been preparing the markets towards for months following such a spectacular rebound in stocks after the victory by Trump, it will raise questions over credibility and concerns that they are worried about Donald Trump taking over office in January.
There is also a prolonged threat to emerging market currencies that once Donald Trump completes his inauguration early next year that he will publically encourage higher US interest rates during the course of his presidential term. While the Federal Reserve is independent to any political party or government, the expectations that Trump will encourage faster monetary policy normalization is a real threat to the emerging markets.
Overall the combination between the initial response that fiscal stimulus encouraged by Trump should provide a boost to the US economy and also encourage increased interest rates in the United States should in theory result in projections that the Dollar Index could break the psychological level at 100.
Undoubtedly, last week is one to remember for years to come, not only because of Trump’s surprising victory, but the market's reaction to the new president. Instead of equity markets plummeting and bonds surging due to a new chapter of political uncertainty, stocks rallied to new records and U.S. treasury bonds declined to levels last seen in January. Investors decided not to waste time and were very fast to adjust their portfolios based on Trump’s promises of fiscal spending, cutting taxes, trade relations, and less regulations.
Here’s a summary of last week’s markets biggest moves on Trump’s Triumph
S&P 500 financial sector was up 11.33% to become the third best performing sector for the year, as steepening yield curves and anticipated regulatory relief made it investors best choice.
Industrials and health care were the second and third best performing sectors gaining 7.95% and 5.82% respectively.
Utilities “bond proxies” lost 4.08% as U.S. 10-year treasury surged from 1.83% to 2.11%.
The dollar strengthened across the board, especially against emerging markets currencies which fell the most in 5 years. The Mexican peso traded at new record low shedding 13.16% of its value since Wednesday.
Trump’s transition will remain a big factor influencing financial markets the weeks ahead especially as he starts revealing the names of people who will serve in his administration. We also have a busy economic calendar and speeches from top central bankers.
Investors are pricing in 81% chance for a rate hike in December, and Fed presidents who spoke after the election seems to be in line with the market expectations. Vice Chair, Stanley Fischer welcomed the prospect of expansionary fiscal policies and believes that the case for removing accommodation is quite strong. I think what’s more interesting than a Fed rate hike in December is to see whether the dots “which shows the interest rate projections of the 16 members of the Federal Open Market Committee” starts climbing after falling for several years.
On Thursday, we will hear from Chair Janet Yellen who will testify to the Senate’s Joint Committee. She’s likely to keep December rate hike alive as Trump’s Christmas gift.
Cable traders will also be interested in what BoE’s Mark Carney has to deliver on Tuesday when he releases the latest inflation report, economic forecast and outlook policy. On the data front inflation, employment and retail sales are key figures to determine whether Sterling can continue moving higher.
Dollar bullish investors stole the show during trading on Monday with the Dollar Index surging to eleven-month highs at 100.00 as expectations intensified over the Federal Reserve raising US interest rates in December. The Dollar’s appreciation was complimented with optimism towards Trump’s administration bolstering spending and reviving inflation, a move seen as supporting economic growth in the States.
With recent comments from Vice Chair Fischer, Lacker and Williams adding to the hawkish chorus of Fed officials signaling a December rate hike, the Dollar could be a buyers dream moving forward. Sentiment is heavily bullish towards the Greenback and the 81% probability of a rate hike before year-end could keep the currency buoyed. Much attention may be directed towards Tuesday’s retail sales figures which if exceeds expectations may add to the pool of economic data that continue to display signs of economic stability in the States.
The Dollar Index is bullish on the daily timeframe as prices are trading above the daily 20 SMA while the MACD has crossed to the upside. A decisive breakout and daily close above 100.00 could open the doors towards 100.50 and potentially higher.
Japan’s Q3 GDP a pleasant surprise
Optimism towards Japan’s economic recovery received a boost during early trading on Monday following the nation’s impressive third quarter GDP figure of 0.5% which quelled some fears over faltering economic growth. The unexpected expansion eased anxieties over the ineffectiveness of Abenomics while also providing some support to Japanese Prime minister Shinzo Abe as he faces a potential economic repercussion from the shocking U.S presidential victory.
With Japan’s third quarter economic growth heavily driven by exports rather than consumption, concerns still remain elevated over the sustainability of the current recovery. It should be kept in mind that consumption in the world’s third-largest economy remains weak while fears of Donald Trump’s protectionist views on trade have kept Japanese government officials on edge. The overall outlook for Japan continues to look fragile with risk aversion amid the ongoing uncertainty pressuring the nation further as the Yen appreciates.
The USDJPY is heavily bullish on the Daily timeframe as the combination of Dollars strength and temporary Yen weakness amid the risk-on trading environment encourages bullish investors to attack. Prices are trading above the daily 20 SMA while the MACD has also crossed to the upside. A breakout above 108.00 could trigger a further incline towards 111.00.
WTI bears on the offense
WTI oil was shaky on Monday as the heightened fears over the persistent oversupply of oil in the global markets haunted investor attraction. Recent reports of Iran pumping incessantly in a self-fulfilling quest to reclaiming lost market share continues to attract sellers while optimism has faded over November’s pending OPEC meeting concluding with an effective freeze deal. The Dollar resurgence amid rising US rate hike expectations simply pressured oil prices further with concerns that demand may be waning from slowing global growth capping oils upside gains. The bearish combination of Dollar strength, oversupply concerns, and fears of slowing demand have made WTI Oil fundamental bearish. Steeper depreciations could be expected in the medium term once bears conquer the $43 support.
Currency spotlight – EURUSD
The EURUSD commenced the week under tremendous pressure with prices cutting below 1.0800 as a resurgent Dollar enticed bears to install heavy rounds of selling. Donald Trump’s shock victory swiftly sparked speculations of the European Central Bank extending its QE program at December’s meeting, consequently leaving the Euro vulnerable to losses. The mixture of Euro weakness and Dollar strength has made this pair attractive to sellers with further declines expected as expectations heighten over the Fed raising US rates before year end. From a technical standpoint, prices are trading below the daily 20 SMA while the MACD has also crossed to the downside. Previous support around 1.0800 could transform into a dynamic resistance which may open a path lower towards 1.0600.
The financial markets’ reaction to Trump’s victory seems to be abating early Tuesday with the dollar index retreating for the first time in six days after approaching its highest levels in nearly 13-years. Global bonds sell-off also took a break after wiping out almost $1.5 trillion from its value.
More interestingly, yields on Japan’s 10-year JGB’s rose above zero for the first time since September 21 and if they settle above zero, it will be for the first time since February 23, leaving only its Swiss rival in negative territory, suggesting that we’re approaching an end to the negative interest rate world.
Fixed income portfolio managers are challenged by Trump’s expected economic policies of more fiscal spending and borrowing to boost growth and inflation levels. However, it’s still not clear yet if the Fed will start responding to these policies by accelerating rate hikes expectations and whether a conservative republican Congress will pass an aggressive fiscal stimulus plan.
Sectors in U.S. equity markets diverged substantially. Financials and industrials continued to lead, sending the Dow Jones to a new record high while the technology sector was left behind weighing on heavy tech Nasdaq index. If the divergence continues within these major sectors it could send a warning signs to investors that the rally is not sustainable, especially since long term fixed income maturities have started to look attractive.
Investors will turn their attention to economic data with a busy calendar ahead for today. Growth figures and inflation data from around the Eurozone and UK will attract attention away from Trump. UK’s consumer prices are expected to show prices edged up again in October albeit slightly from September’s reading, meanwhile the retail price index is forecasted to exceed the 2% benchmark for the first time since 2014. Of course, UK’s rising inflation has a lot to do with the pound’s slump, but another factor to consider going forward is oil prices which will start losing their influence on inflation as they stand on the same levels they were a year ago. The same applies to the Eurozone where ECB plans of extending QE program seems to be challenged when inflation returns.
