- Markets should continue to trade with caution ahead of the weekend and US election, with risk skewed to the downside
- Long gold trade remains the purest play
- Today, US payroll reports should support our view that the US is exhibiting a cyclical downturn with NPF at 160k against market consensus of 173k.
- Risk appetite has stabilized yet remains soft in light of growing uncertainty around the US election and Brexit
- We continue to see long GBP opportunities in short term sell-offs
- USD is stronger against G10 and EM currencies, reversing the recent sell-off
- CNN polls indicate that Clinton has a 46% to 45% lead of Trump. Our US election predictive market analysis tool, indicates that the spread is narrower and forecasting further tightening in the polls ahead
Risk appetite has stabilized yet remains soft in light of growing uncertainty around the US election and Brexit. In addition, news flow from Turkey that opposition lawmakers have been detained is generating unwarranted nervousness. Asian regional equity indices were lower with the Nikkei down -1.34%, Shanghai Composite -0.12% while the Hang Seng is flat. In FX, USD is stronger against G10 and EM currencies, reversing the recent sell-off. While the political risk has increased with national polls narrowing, Clinton continues to have the lead. CNN polls indicate that Clinton has a 46% to 45% lead of Trump. Our predictive market analysis indicates that the spread is narrower and forecasting further tightening in the polls ahead (See Swissquote’s US Election Analysis page). Heading into the last weekend before America heads to the polls, anything can happen.
Oil futures fell to a six-week low as speculation that OPEC will be unable to limit production with a member agreement intensified. In Australia, retail sales came in at 0.6& m/m above expectations for 0.4% and the prior month's read of 0.4%. In Japan, new data indicates that the service sectors expanded in October with a PMI read of 50.5 from 48.2 in September. Output rose in individual firms supported by a surge in new orders.
Finally, Brexit took an unexpected turn as the court ruled that the UK parliament has the right to vote on Article 50. The government will appeal the high courts verdict and a Supreme Court hearing is scheduled for 5-8 December. Should the concept of the referendum provide the government with special power, the likelihood of an “ultra-soft Brexit” (i.e non-existent Brexit) increases significantly. We continue to see long GBP opportunities in short term sell-offs.
Markets should continue to trade with caution ahead of the weekend and the US election, with risk skewed to the downside. Long gold trade remains the purest play from most of risks currently in focus. Today US payroll reports should support our view that the US is exhibiting a cyclical downturn with NPF at 160k against market consensus of 173k. Despite supportive seasonal factors, uncertainty continued to dampen October hiring.
Don't panic. Yes we see the signs.Eight down days on the S&P 500 (after four months of sideways trading), global long-end yields rallying, volatility rising across-the-board, Trump close to ascending into the White House and the Chicago Cubs winning the world series.
Maybe now is the time to sell….everything…the problem however, is that in our mind, structurally nothing has changed. Speculation and innuendos are driving uncertainty. Chatter that central bank reflation experiments have failed, the UK parliament is plotting to steal the EU referendum for the UK citizens and dead people voting for Hillary Clinton - all further evidence that the financial fridges are now mainstream. While this desk has its fair share of conspiracy theories and can see clear value in some of the ideas getting tossed around, now is just not the time. Let’s remember that in 2016 plenty of experts predicted the crash. Perhaps the end-of-year has the same effect on elderly people who lack the understanding to see the world in a fluid continuum but rather in distinct calendar years.
First, is the wall of liquidity just waiting for opportunities. There is evidence that equities are being overbought (S&P p/e is at manageable 19) even less so with the current pullback they are experiencing. Estimates indicate that $12bn is now sitting in negatively yielding paper. This massive number is unlikely to remain trapped especially after clearing the Nov. 8th event risk.
Second, the OECD lowered their 2016 growth estimate 0.1% to 2.9%. While not an amazing number it is stable and comes with acceleration in the US and China, which means that demand is starting to safely recovery. Improvement fundamentals have supported the rational decisions to liquidate long end paper and predicted the normalization of policy. However the shallow recovery indicates that tightening will not occur too quickly, allowing for normal adjustment.
Finally, it's clear that central bank policy is nearing exhaustion point. BoJ owns over 455 of the government bond markets and 65% of the domestic ETF market. However, there are still tools and strategies to keep conditions loose and and never underestimate a central bank's commitment to distort market conditions to their benefit. Despite the hype with plenty of liquidity, improving fundamental and central bank-prepared stimulus, we think that the current correction in risky asset is an opportunity to reload long positions. History also suggests that regardless of who is in the White House (think President Obama), the USA still remains largely unaffected by a single individual.