October 31, 2016

Markets Today: The Fear

In the hour after it was announced that Hillary Clinton’s e-mails were the subject of a new FBI probe, USD/JPY dropped from Y105.50 to Y104.50, the S&P dropped 20 points or 1% with the VIX spiking by 19% and 10-year Treasuries dropped 2bps from 1.85% to 1.83%.

Lily Allen described her 2008 hit as a sarcastic indictment of celebrity culture. There are few bigger celebrities than Donald Trump and markets on Friday demonstrated that they fear him as President far more than they fear the Fed. In the hour after it was announced that Hillary Clinton’s e-mails were the subject of a new FBI probe, USD/JPY dropped from Y105.50 to Y104.50, the S&P dropped 20 points or 1% with the VIX spiking by 19% and 10-year Treasuries dropped 2bps from 1.85% to 1.83%.

Earlier Friday, Q3 US GDP exceeded expectations at 2.9% (consensus was 2.6%) but on inspection the underlying growth rate looks to have been a fair bit less than that. Inventory accumulation accounted for 0.6% or about 20% of the growth rate and, according to our friends at Pantheon Macroeconomics, soybean exports a full 0.9% or just under another third of the total. Private consumption ran at a rate of just 2.1%, less than half Q 2s 4.3% run rate.  The dollar and Treasury yields jumped but only momentarily as algorithmic traders did what they do on above consensus headline numbers.

In stocks, the small pull back into the close after the early afternoon Hillary FBI news left the S&P500 down 0.31% at 2133 with the VIX finishing the day 0.83 or 5.4% higher and on the week up 21.4% or 2.85 points.

In US rates the ongoing bear steepening theme that resumed earlier in the week reverted to bull steepening on Friday (the Fed won’t be raising rates in December if Donald is elected President in November). Fed pricing for December slipped to 74.4% from 79.6% Thursday. 2-year Treasuries ended Friday 3.2bps lower at 0.855% (still +3bps on the week) and 10s -0.7bps to 1.848% (+11.2bps on the week). UK 10 year gilts meanwhile have continues to lead the global yield back-up, 17.3bps higher on the week at 10 years.

In FX, the US dollar was softer across the board in G10 FX land with the exception of the CAD (USD/CAD +0.09% to 1.3398). The dollar was on the back foot soon after the initial knee-jerk positive reaction to the GDP data and zigzagged down throughout the NY session. It fell initially on the Hillary news, so illustrating an ambiguity as to the whether safe haven flows would necessarily be a dominant – dollar positive – influence if Trump were to emerge victorious on 9 November.

The DXY lost 0.55% to 98.348 thanks to EUR/USD leading the dollar downturn, +0.81% to 1.0985. The broader BBDXY lost 0.32% and the ADXY gained 0.13%. USD/MXN was, inevitably, the biggest EM mover, +0.77% to 18.9844. USD/JPY lost 0.52% to Y104.75 having made an earlier high at Y105.53. This and the 0.55% drop in USD/CHF tell us that the Yen and Swissie retain their pre-eminent safe-haven characteristics in times of market stress.

AUD/USD crept briefly back on to a 0.76 handle before finishing NY trade 0.13% higher at 0.7599 but has started the news week back nearer 0.7580 after the weekend brought nothing to calm Friday’s nerves.  An ABC/Washington Post poll released Sunday scores decided voters 46/45 for Clinton while the fivethirtyeight.com website puts the probability of Trump win at just over 20% from under 14% a week ago.

Coming Up

The US elections are now just 8 days away, before which there is more than enough on this week’s calendar to hold market interest.  Locally, it’s the RBA on Tuesday but where after last week’s CPI data markets are ascribing a mere 3% chance to a rate cut. The Statement on Monetary Policy comes on Friday, before which we’ll get building approvals on Wednesday, trade data on Thursday and, at the same time as the SoMP, retail sales for both September (nominal) and Q3 (real). Today sees the Melbourne Institute’s October inflation gauge and RBA September credit data.

Internationally, it’s the Fed on Tuesday and Wednesday (statement at 05:00 AEDST Thursday) but where a no change is assured (several Fed officials as told us as much given the proximity to the election and the fact it’s not a post-meeting Yellen press conference affair).  The Fed won’t need to put markets further on to the scent of a December tightening than they are already. More important in this regard will be Friday’s October employment report. Before the latter we’ll get the manufacturing ISM survey on Tuesday and the non-manufacturing version on Thursday.

China PMI data is also due, official and Caixin manufacturing on Tuesday together with the official services version and then Caixin services on Thursday. The Bank of England is now expected to leave policy unchanged on Tuesday and, if latest UK press reports are to be believed (FT) this won’t be Governor Mark Carney’s last. The BoJ meets tomorrow and again no change is widely expected.


On global stock markets, the S&P 500 was -0.21%. Bond markets saw US 10-years -0.68bp to 1.85%. In commodities, Brent crude oil -0.54% to $49.71, gold+0.9% to $1,277, iron ore +1.4% to $63.96. AUD is at 0.7585 and the range since Friday 5pm Sydney time is 0.7559 to 0.7604.

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