Global bonds rallied, equities declined and the VIX spiked on Monday ahead of the first of three U.S. presidential debates before the November 8th election. Nominees Hilary Clinton & Donald Trump are scheduled to begin the debate around 11:00am Sydney time today with current polls by Bloomberg suggesting that the nominees are neck and neck as Clinton’s lead has diminished over the past three months following concerns around her health, her family charity activities and fresh criticism over her use of personal email while U.S. secretary of state. At the same time Donald Trump has been on his best behaviour in an attempt to prevent himself for scuttling his own campaign.
Both the S&P 500 & Nasdaq 100 declined -0.86% respectively with both Healthcare & Financial sectors leading declines, down -1.24% & -1.19% respectively. Just over 80% of all stocks in the S&P500 finished trading lower for the day, highlighting broad selling. Yields on U.S. government debt declined as investors move into safe haven assets as they face uncertainty around this election, the yield on two-year debt declining -1.6 basis points to 0.7377% as did the yield on ten-year securities, down 3.1 basis points to 1.5839%. Meanwhile the VIX index which measures implied volatility or a gauge of fear in the market jumped +17% to 14.5 shown on the first chart below along with the S&P500 index, highlighting the inverse relationship between the two.
We also had Fed speakers overnight with the President of the Federal Reserve of Dallas, Robert Kaplan, stating that he would have been comfortable in seeing some removal of accommodation in September citing concerns “about distortions rates this low are creating”. At the same time he also noted that there aren’t signs the U.S. economy is overheating and declined to comment whether or not he would have voted to dissent at the September policy meeting. Kaplan is not a voting member of the FOMC this year however will be a voting member for the first time in 2017.
Elsewhere Daniel Tarullo who is a member of the Board of Governors for the Fed stated that the Fed will seek significantly more capital from the largest U.S. banks while providing some relief to smaller lenders as it updates its annual stress tests. Tarullo noted that “financial regulation should be progressively more stringent for firms of greater importance” and an outline of the new capital plan is expected to be released next year. Officials have stated that this will not impact the 2017 stress test.
European equity benchmarks also declined as Mario Draghi addressed the EU parliament where he said that the U.K. should not be granted any favours regarding access to the single-market that “any outcome should ensure that all participants are subject to the same rules”. He also took the opportunity to once again call on other policy makers outside the ECB to do more, highlighting that “actions by national governments are needed to unleash growth, reduce unemployment and empower individuals”.
The Euro Stoxx 600 declined -1.55% as did the DAX down -2.19% with Deutsche Bank AG (DE:DBKGn) weighing significantly on the index, down -7.17% shown on the chart below amid new concerns Germany’s largest lender will need to raise more capital to settle larger than expected fines relating to mortgage-backed security sales leading up to 2008.
The EUR/USD strengthened +0.23% as the yield on German government debt declined as German IFO surveys were better than expected. The business climate survey for September exceeded expectations of 106.3 with an actual of 109.5, as did the current climate assessment at 114.7 vs 112.9 expected. Future expectations also surpassed estimates of 100.1 with a reading of 104.5. The yield on two-year securities fell -0.8 basis points to -0.677% as did the yield on ten-year securities, down -2.7 basis points to -0.108%. In the U.K. the GBP/USD was little changed, up +0.06% as the FTSE100 declined -1.32%.
In Japan the stronger USD/JPY continues to weigh on equities, with both the Nikkei & Topix finishing Tuesday -1.25% & -1.02% weaker respectively as the Yen gained +0.75% against the U.S. dollar. The yield on two-year debt was unchanged at -0.226% while the yield on ten-year JGB’s declined -0.8 basis points to -0.06%.
To commodities, oil rebounded as an informal meeting between OPEC & non-OPEC producers kicked off in Algeria. Prices for Crude Oil & Brent crude oil gained +2.56% & +2.40% respectively after having fallen nearly 4% on Friday as hopes for any sort of agreement at this meeting fade. Copper declined -0.57%, the Thomson Reuters CRB index gained +1.03% as did natural gas up +1.83% as supply is expected to ease more than demand in the coming fortnight. Spot gold was relatively unchanged, up just +0.03% while spot Silver declined -1.20%.
Locally the AUD/USD was +0.22% higher on Monday as the S&P/ASX 200 outperformed regional peers as it finished almost unchanged at 5,431.42 up just +0.12 points as the MSCI AC Asia Pacific Index fell -0.80%. Meanwhile the market looks set to open weaker this morning with ASX SPI200 futures down 44 points in overnight trading.
Data releases:
- U.S. Presidential Debt 11:00am AEST
- Chinese Industrial Profits (YoY Aug) 11:30am AEST
- U.S. S&P/Case-Shiller Composite (YoY Jul) 11:00pm AEST
- U.S. Markit Services & Composite PMI (Preliminary MoM Sep) 11:45pm
- U.S. Consumer Confidence (MoM Sep) 12:00am AEST
- Fed Vice Chair Stanley Fischer Discusses Economics 1:15am AEST
This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. 