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Markets start to price in a Clinton win

While yesterday's rebound in US equities was much more pronounced than that in the US dollar, it nevertheless has all the makings of pricing in a Clinton victory, now that the cloud of an FBI investigation has been removed.

However, there remains a risk that the euphoria could prove short-lived, particularly if the polls spring a surprise.

The recovery of both the Dow and S&P 500 saw both indices wipe out all of last week's losses in a single day. 

With the finishing line now in sight financial markets are reacting as if a Clinton win is a done deal, in eerie echoes of the lead-up to the June UK Brexit vote, as markets priced in the preservation of some form of status quo, and we all know how that ended.

It is certainly true it’s hard to compare a binary referendum outcome to a US presidential election, but is also true that both candidates are deeply unpopular and that unpopularity could well trigger a low turnout, which could favour Donald Trump. So anyone betting the house on a Clinton win would do well to remember the lessons of 23 June.

Whichever way the result goes there is one inescapable fact that investors surely cannot ignore. Even if Donald Trump loses, the political narrative in the US has changed irrevocably and probably not for the better, as any new president will have to preside over a nation more divided than ever, and that could make any new government policies, whoever is elected, much less business and free trade friendly.

Of more importance of who becomes President will be the makeup of the respective houses and if the Republicans maintain their blocking majorities then Mrs Clinton could well find out that her ability to do anything will be constrained in the same way President Obama’s has been over the past few years.

Even though market attention has been predominantly on the US election the Chinese economy does appear to be showing evidence of a weak recovery, the weakness of a currency is still a cause for concern, though a lot of that is also likely to be a result of the strong US dollar.

Despite the recent improvement in some of the latest economic data the trade picture has been a little more mixed.

In September the trade numbers were disappointing with the export picture rather disappointing given the recent weakness in the currency, showing a 10% decline. This would appear to suggest that global demand either remains weak or that Chinese exports remain uncompetitive despite the slide in the currency.

Imports were also disappointing in September, declining 1.9% though this was largely as a result of a slowdown in demand for commodities.

Today’s October numbers came in at -7.3% for exports while imports showed a decline of 1.4%, both an improvement on the September numbers but still worse than expected. The contraction in exports is particularly concerning given that the currency has been allowed to decline quite sharply in the past couple of months. This would suggest that despite improvements seen in recent local economic data, in countries like the US, Japan as well as the EU that global demand for Chinese produced products remains weak.

This weak performance is likely to prompt further speculation about further currency declines against the US dollar as Chinese authorities look to boost lost competitiveness.

The resilience of the UK economy has continued to confound the most pessimistic of expectations over the past few months, and while last months early Q3 GDP number showed that manufacturing was a weak spot in Q3, today’s latest industrial and manufacturing production numbers for September could help give a welcome boost to the sector as we get a better indication of how the economy did at the end of the quarter.

We saw the beginnings of a recovery in North Sea oil production in September and this could well be reflected in the latest numbers, after a disappointing August. Manufacturing production is expected to rise 0.4% while industrial production is expected to come in at 0%.

EUR/USD – last week’s failure at the 1.1140 area has seen the euro fall back towards the support at 1.1020 area. A break below the 1.1020 area opens up a potential return to the 1.0950 area. A move above 1.1170 is needed to open up the 1.1300 area again.

GBP/USD – after peaking last week at 1.2560 the pound has slipped back and could well head back towards the 1.2330 area. A move through here opens up the potential to revisit the recent lows near the 1.2100 area.

EUR/GBP – the 0.8950 appears to be capping the upside for now which keeps the prospect of a move back towards the 0.8780 on the table. A recovery back through the 0.8960 area is now needed for a return to the 0.9050 area.

USD/JPY – yesterday’s recovery has the potential to open up a return to the 105.00 area and the October highs. A move through 105.20 could well signal a move towards 106.00. Any pullbacks should find support between the 103.50/70 area.


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