Market Brief
The one-two punch completely knocked the risk appetite out of financial markets. First came the news that certain polls had Republican presidential candidate Donald trump ahead in the national poll. We believe the markets remain complacent and underpriced to the real potential of a Trump victory. Before markets could recover from the shock, the Fed signalled that a December’s 25bp interest rate hike was likely. Wall Street continued its seven day correction lower, slipping below the psychological handle of 2100 for a short period. In the FX markets, our election currency basket was in full reaction mode. USD and JPY were both in high demand (alongside CHF) while MXN, CAD were under significant selling pressure. FX markets remain highly correlated to the US elections and will remain volatile ahead of Nov 8th. Asian regional equity markets were able to fend off a complete capitulation sell off, yet a majority were lower. The Hang Sang fell -0.30% while the Shanghai composite rallied 0.84%. Asian stocks were supported by economic data indicating that that China's service sector increased at its fastest pace in four months. Chinese Caixin PMI data firmed as the services gauge increased to 52.4 vs. 52.0 and the composite measured at 52.9 vs. 51.4. In commodities, gold continued to benefit from weak risk sentiment climbing to $1306. The crude slide continued as US oil inventories indicated a massive build-up. Crude Speculative interest has been caught long making unwinding positions difficult. News of an attack on a Nigerian oil pipeline has had a muted effect on oil futures.
As we had expected, the Fed held monetary policy unchanged yet shifted closer to a December rate hike as members indicated that the US economy “continued to strengthen.” Yet the Fed was waiting on “some” further evidence of firming near objectives before raising interest rates. Interestingly, the Fed statement removed reference to inflation expectation remaining low in the “near term” and reiterated the forecast that inflation will rise to 2% target over the mid-term. Fed fund futures pricing increased to 78% from 70% at the start of the week. The vote was 8-2 with George and Mester dissenting and Rosengren shifting back into the majority. Elsewhere, US private sectors (ADP) added a soft 147k jobs in October below the 202k in September. We continue to expect a cyclical deceleration in the US economic data which will keep the Fed from raising rates in 2017.
Traders should expect a big day for GBP. In an uncertain event, the UK high court will issue a ruling on whether the government releases Article 50 without the consent of parliament. Should the government lose its case we would see a decent GBP bounce give the extensive short position. However, should they win, an appeal is clearly on the table for which the Supreme court has provided a hearing time on December 7th-8th. Regardless of the outcome, this legal appeal clearly provides additional uncertainty to what is already an extremely cloudy and complex situation.
In regards to the BoE this will be the most complete set of data since Brexit. We anticipate that the BoE will remain on hold as economic data remains firm despite the skeptics. Markets will be interested in the Quarterly Inflation Reports upward revision in inflation and growth which were both projected to evaporate after Brexit.
GBP has rallied in recent days in expectation of a strong UK and the probability of further policy actions has decreased, triggering a sharp sell-off in gilts. We continue to see short term GBP buying opportunities as the politically-driven Brexit story continues to capture headlines but lacks tangible results.
Elsewhere, markets will get US ISM non-manufacturing, factory orders, and durable goods orders
Currency Tech
EUR/USD
R 2: 1.1352
R 1: 1.1210
CURRENT: 1.1096
S 1: 1.0822
S 2: 1.0711
GBP/USD
R 2: 1.2857
R 1: 1.2477
CURRENT: 1.2267
S 1: 1.2083
S 2: 1.1841
USD/JPY
R 2: 111.45
R 1: 107.49
CURRENT: 103.56
S 1: 102.80
S 2: 100.09
USD/CHF
R 2: 1.0093
R 1: 0.9999
CURRENT: 0.9707
S 1: 0.9843
S 2: 0.9632