Markets both fearful and complacent before the US election

Less than a week out from the US election and markets are demonstrating both complacency and a palpable fear at the same time. A surge in the VIX index shows volatility is on the rise and investors are hedging equity exposure with safe havens like gold and government bonds. But at the same time equity benchmarks are only modestly down, showing an overriding comfort in owning stocks.

UK & Europe

Less than a week out from the US election and markets are demonstrating both complacency and a palpable fear at the same time. A surge in the VIX index shows volatility is on the rise and investors are hedging equity exposure with safe havens like gold and government bonds. But at the same time equity benchmarks are only modestly down, showing an overriding comfort in owning stocks.

The VIX is up over 40% in the last seven days, reaching above 18, a level in which many investors sit up and pay attention to signs of heightened risk in the market. Over that same period the FTSE 100 and S&P 500 are down 2-3%.

There is still a general perception that Hillary Clinton will take the White House, but the surprise Brexit result is fresh in minds of investors and they are buying gold and VIX index tracking products to hedge their bets.

Weak sentiment ahead of the election and Wednesday’s Fed meeting was compounded by a slump in oil prices after the DOE reported its largest build in weekly inventories on record of 14.42M barrels.

The price of gold back within a whisker of $1300 per oz and near a one-month high has put gold-miners Fresnillo and Polymetal near the top of the UK equity benchmark.

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Shares of Next rose over 3%, pulling other clothing retailers including M&S and Primark-owner ABF higher after a well-received update. The move higher in the share price, despite falling sales, comes from relief that Next has kept its full-year profit forecast as sales turned a corner in October, raising hopes of a bumper Christmas.

Another solid set of numbers from Persimmon, despite signs of the housing market losing momentum and Brexit fears, has benefitted other homebuilder shares.

Banks fared less-well with Standard Chartered shares down over 3% on the FTSE 100, adding to the decline after weak earnings. On the continent, Italy’s Monte dei Paschi dropped limit down over 6%. Falling yields, which hurt bank profit margins, and another desperate attempt at asset sales from Italy’s biggest lender UniCredit are hurting demand for bank stocks.

 

US

Stocks in the US traded lower with the Dow Jones Industrial Average dipping below 18,000 in another challenge to the price floor that has been in place since early September.

If the share price of Apple is any guide, US equity benchmarks could be headed a lot lower. Apple shares are teetering on correction territory with a drop of over 10% from its 52-week high.

The normal tension before a Federal Reserve meeting is there, but this time it is because of the Presidential election rather than any chance of a change in policy or language from the Fed. Janet Yellen may as well have cancelled the meeting this week, because there is almost no chance that the committee will risk rocking the boat less than a week before the election.

 

FX

A shift out of the dollar has seen FX markets temporarily ignore gilt yields falling faster than yields on the US 10yr note, sending the British pound to a three-week high.

A bigger than expected improvement in UK construction data in October as well as signs fiscal conservatism will be maintained under Theresa May’s government have helped Sterling. Talk that Philip Chancellor Hammond will take a “flexible fiscal framework” rather than a both-feet-first fiscal stimulus should help stave off any imminent ratings downgrade to UK debt.

A balanced ADP report that widely missed estimates for October but saw a substantially higher revision for September had minimal impact on the US dollar.

 

Commodities

Gold is being accumulated as a hedge against equity market declines before the US election. The uncertainty of a Donald Trump election victory could easily derail the chances of a US interest rate hike in December. The likely drop in the US dollar as rate hike expectations fade would benefit gold.

Pretictably, the biggest reported build in US weekly inventories has been bad for the price of crude oil. US production has risen three weeks in a row, supported by the higher prices brought about by OPEC’s planned production cut. US shale companies have used the OPEC rebound to lock in higher prices and are back to producing. Not only does the data spell out the ongoing supply glut with a capital ‘S’ – it could see Saudi Arabia, the de facto OPEC leader, row back on plans to cut output and return to defending its market share with unrestricted production.

 

 

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