Markets Today: The heat is on

And it’s on two fronts this morning. The first is of course the election outcome as America votes to elect its 45th President. The second story relates to news breaking out of China yesterday that the authorities are stepping in to take the heat out of coal and steel-related prices.

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FX markets overnight initially saw the USD on the bid with the closely-watched RealClear Politics poll of polls having Clinton 3.2 points ahead, 46.8/43.6, adding to risk-on sentiment.  But as the session has worn on, the US has been more choppy.  The Mexican Peso has though strengthened, the USD losing 1.04% against the MXN.  AUD and NZD have been strong performers, the AUD/USD touching on 0.7756 as this report goes to print.  Clearly, the market this week is pricing back toward a Clinton win, in which case it could be the calm before the calm, and if Trump wins, then risk-off will likely very quickly ensure in knee-jerk fashion.

US equity markets have rallied and US Treasury yields have pushed higher by 4½-5 bps along the curve.  Non-FOMC voter this year but voter in 2017, Charles Evans has been on the wires saying he’d prefer to be patient before hiking, wanting core PCE inflation at 1.9% before hiking, but thinks the inflation outlook will justify three rate hikes between now and the end of 2017.

So the timeline for the election outcome runs something like this. Generally, there’ll be a wait until 04.00 GMT (3pm AEDT) before the West Coast polls close and when in the last two elections the result overall was known within 15 minutes.  Before then, East coast polls close at 11am AEDT and some pundits are saying that that Virginia might be a litmus test – or as one correspondent described to me this morning, the Sunderland of this election – Virginia having gone to Obama in the past two elections, but before then Republican.  11.30 comes the key swing states of North Carolina and Ohio, Ohio having gone to the winning Presidential candidate in every election bar one since the second world war.  But then again, it could be a different rule book this time.

The other big news out overnight comes from China and relates to market-focussed policy efforts to take the heat out of coal and iron ore space.  News service MNI reported yesterday that Chinese authorities have taken steps to crack down on “illegal coal trading”, obviously concerned about the stratospheric rise in coal prices this year, that’s apparently been turbocharged by additional local investor buying interest.  Spot hard coking coal prices (most sales would still likely be under the quarterly contracts) had risen more than 3½ fold this year, with Newcastle thermal coal futures more than doubling.  Three Chinese futures exchanges that trade in such commodities yesterday increased margin requirements and transaction fees on coking, thermal, and steel-related futures prices.  January thermal coal futures on the Zhengzhou Commodity Exchange fell 5% Tuesday to close at CNY670.60 a ton. On the Dalian exchange, coking coal futures lost 6%.  Ex-China Platts coking coal and Newcastle futures look to have risen further yesterday.  Iron ore was up further too.

Clearly this will very likely take more heat out of the very pointiest end of the market but it’s been the admitted success of reforming the Chinese coal industry that’s led to market shortfalls.  Selected more efficient and less polluting Chinese producers have recently been given the green light to increase output.  Australian and other global producers are also no doubt lifting their production sights. That will take some more time.

Coming up

So finally the day of reckoning has arrived as US voters cast their ballots to elect a new President, Vice President and their Congressional leaders.

On market reaction, trading over recent days has given a pretty clear pointer to how markets might initially react.  Clinton wins and it’s risk-on, equities rally, bonds are heavy and the USD comes back as a preferred asset.  Risk-off currencies such the yen and the CHF would be sold as the first port of call.  Aussie and Kiwi would benefit, other things being equal.  Should Trump win, then the initial reaction is likely to be risk-off, a reverse, at least initially as markets begin to focus more intensively and price toward what a Trump Administration might mean at such an early stage of the process.

As the vote unfolds, it’s going to be all about the swing states evolve and that magic 270 Electoral College votes needed to win.

Overnight

On global stock markets, the S&P 500 was +0.47%. Bond markets saw US 10-years +3.76bp to 1.86%. In commodities, Brent crude oil -0.56% to $45.89, gold-0.2% to $1,277, iron ore +1.3% to $68.30. AUD is at 0.7756 and the range since yesterday 5pm Sydney time is 0.7694 to 0.7755.

Good luck.

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