The election related slide that started yesterday has continued overnight. Asia Pacific indices were hammered with the Nikkei falling 1.75% and the Hang Seng dropping 1.45%. In Europe, the FTSE is down 0.4%, the Dax is down 0.9% with some continental indices down over 1.0%. US index futures are trading down 0.25%with the Dow heading under 18,000 and the S&P testing 2100. Capital has been flowing into defensive haves particularly JPY, bonds and gold which is up 0.5% and nearing $1,300 per ounce.
I've been warning for weeks that the markets have been too complacent about the US election and that overcommitting to a Clinton win was leaving traders exposed to a Brexit level surprise. Donald Trump's campaign has been picking up momentum in earnest closing a 12 point gap and taking the lead in some polls.
Yesterday and overnight traders started taking the potential for a Trump win or a contested election much more seriously. A close vote or Republican upset could increase political uncertainty and market risk especially with such wide differences between the two platforms.
The realization that Trump could win sent stocks sharply lower toward key support levels. It also started to drag USD down on speculation that post-election volatility could postpone a Fed rate hike or slow the pace of future increases. Increased political uncertainty sparked rallied in traditional defensive havens. Gold led the charge but more importantly the defensive rally gained breadth with JPY joining in shrugging off a neutral to dovish Bank of Japan.
This action sets the stage for Wednesday's Fed decision. Normally with an election less than a week away one would expect the Fed to go very quiet (and many market players still think this way). As far as the economy goes, it doesn't really matter if the Fed raises rates now or next month, one rate hike this year is widely expected. So whatever decision we get may be more guided by politics.
The Fed may not be able to escape the spotlight this time regardless of what it does. Bank of England Governor Mark Carney politicized his office earlier this year taking the Remain side in the Brexit referendum and scrambling to deal with that loss. In the US, the FBI is under fire from the Democrats for reopening the Clinton investigation, the Fed could come under fire from either of both sides depending on what it does.
Donald Trump has already accused the Fed of keeping interest rates artificially low this year to prop up the economy and that may continue if the Fed does nothing.
Fed Chair Yellen and Governor Brainard have well known ties to the Democrats, and could lose influence if Trump wins. With the Democrats losing ground, a surprise interest increase is looking possible. First, a rate hike spun as driven by a strong economy could be seen as a sign Obama economic policies are working and undermining Trump's calls for change. Second a rate hike could be seen as a pre-emptive move as there has been speculation that volatility related to a Trump win could close the window to a December rate hike.
So no increase would mean the Fed remains confident in a Clinton win . A rate hike could be seen as the Fed hitting the panic button and that Democrats are worried about losing the White House and being punted back into opposition.
Crude oil has been under pressure overnight after US API inventories jumped by over 9 million barrels last week and may remain active through Wednesday’s DOE reports. So far today WTI and Brent are both trading down about 1.5%. The oil selloff may continue to drag on energy stocks, while the gold rally may light a fire under miners.
It is also a busy week for economic data and earnings reports. This morning brings the ADP payrolls report a precursor to Friday's nonfarm payrolls. ADP payrolls have bounced between 150K and 200 K this year. I think election uncertainty may have slowed hiring this fall so I'm thinking 140K for this month.
TransCanada $0.78 vs street $0.68, selling US northeast power business for $3.7B, has decided not to sell any of its Mexican natural gas pipelines, will sell equity instead to fund Columbia Pipeline acquisition
UK BRC shop prices (1.7%) vs previous (1.8%)
UK Nationwide house prices 4.6% vs street 4.9%
Germany unemployment change (13K) vs street (1K)
Germany unemployment rate 6.0% vs street 6.1%
Upcoming Manufacturing PMI reports:
Germany 55.0 vs street 55.1
France 51.8 vs street 51.3
Italy 50.9 vs street 51.4
UK construction 52.6 vs street 51.8 vs previous 52.3
Upcoming significant economic announcements include:
8:15 am EDT US ADP payrolls street 165K vs previous 154K
9:45 am EDT US ISM New York previous 49.6
10:30 am EDT US DOE crude oil inventories street 2.0 mmbbls
10:30 am EDT US DPE gasoline inventories street (1.0 mmbbls)
2:00 am EDT US FOMC interest rate and statement 0.50% no change expected
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