November 8, 2016

Markets Today: The final countdown

Today feels a bit like a trip into the unknown with the US election entering its final stage as Americans head to the polls tonight.

he final countdown is Europe’s biggest hit, it reached number one in 26 countries and is probably one of the cheesiest songs of the 1980s. The song’s lyrics are both apocalyptic and optimistic describing a trip into space and in a similar way today feels a bit like a trip into the unknown with the US election entering its final stage as Americans head to the polls tonight. Well back on earth, price action overnight has been a tale of two halves; European and US equities open sharply higher mimicking yesterday’s upbeat tone in Asia following news that the FBI had cleared Hilary Clinton of any wrongdoing. The positive tone continued in the early part of the session, but in the past few hours markets have traded sideways reflecting a wait and see mode ahead of the election.

The Euro Stoxx 600 index jumped 1.5% after 11 consecutive days of losses with mining stocks leading the way meanwhile US equities are up between 2% and 2.4% and have effectively erased all their November losses.

After six days of consecutive declines the US Dollar (BBDXY) is up around 0.4% with JPY, the preeminent safe haven currency, the biggest G10 loser, down 1.36%. GBP has also come under pressure (-1%) on the back of speculation that the UK government is preparing a first draft of a new bill to trigger article 50. The AUD has benefited from the boost in risk appetite as the VIX index dropped from 22.5 on Friday to 18.67 currently and commodities have also posted decent gains (see more below). The AUD has steadily risen through the overnight session, it is the best G10 performer against the USD (up 0.42%) and it is currently trading at 0.7716. Oil prices have also recovered a bit of loss ground, up between 1.2% and 1.7% with the move boosting the CAD (+0.2%), the only other G10 currency that has outperformed the USD.

As for bonds, yesterday in the Asia session, 10y UST jumped about 5bps to 1.827% on the back of the FBI news and have pretty much traded sideways overnight. Meanwhile 10y Bund and 10y UK Gilts ticked a few bps higher at the open , up 2bps and 7bpsrespectively and have remained in a holding pattern since.

Looking at other commodities, iron ore has continued its ascendency, up 3.7% to $67.4, steam coal also gained another 3% to $112 and Metallurgical coal jumped 7% to $275. In contrast gold is down 1.8% to $1281.

In other news, China’s FX reserves for October were published last night at $3.12tn from 3.17tn in September and slightly lower than 3.13tn expected. Given negative valuation effects of around $20/25bn, this does not suggest significant outflows unless the today’s trade balance for Oct turns out to be very large.

Coming Up

We have a busy day of data releases ending with one of the most important events for the year. Americans will head to the polls tonight to cast their Presidential and Congressional votes, however we are unlikely to know the outcome until tomorrow afternoon Sydney time. As a guide the last two US presidential elections were called in about 3 pm.

This morning NAB releases its Business Survey for October and like most people at NAB your scriber has no access to the survey before it is made public. As a reminder to readers the September Survey pointed to confidence of firms remaining at reasonable levels despite uncertainties lingering in the background (+6 index points, consistent with its long-term average). Meanwhile Business Conditions rose to +8 from +7 and above the long term average of +5. The strength in Business Conditions, however, was heavily skewed towards major service industries, so it will be interesting to see if this tilt was still evident in October.

China’s trade figures for October are out at midday Sydney time. Focus is likely to be on the export numbers (-0.8%yoy exp.) after both the official and CAIXIN PMIs hinted at a softening in external demand. Notably as well, the trade balance is an important piece to China’s capital flow story. The market is expecting a trade surplus of $51.7bn and if correct it would confirm capital outflows from China have continued at decent pace against a weaker RMB backdrop.

Moving onto Europe, Germany and the UK publish industrial production figures for September and the big question here would be to what extent the UK manufacturing sector has been able to benefit from a weaker pound.

Is a busy day of US data releases with the NFIB small business survey, Housing starts and JOLTS job openings being the major highlights, but of course, none are expected to have any market impact with the US election set to steal all of the headlines.


On global stock markets, the S&P 500 was +1.96%. Bond markets saw US 10-years +4.81bp to 1.82%. In commodities, Brent crude oil +1.45% to $46.24, gold-1.8% to $1,281, iron ore +3.7% to $67.43. AUD is at 0.7714 and the range since yesterday 5pm Sydney time is 0.7672 to 0.7719.

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