Risk-Off Move Following US Polls As BOJ And RBA Keep Policy Unchanged

Originally published by Rivkin

Global markets were clearly in a risk-off move on Tuesday as an ABC News/Washington Post tracking poll showed Trump with a lead of 46% compared with Clinton’s 45% although the difference falls well within the margin of error. Still this brings back fresh memories from Brexit and makes markets nervous particularly when a Clinton victory had been clearly priced into the market. A separate national polling average by the Financial Times has Clinton with a lead of 45.3% compared with Trump’s 43.1% suggesting with only six days remaining it may be a close finish.

Investors sold equities and piled into U.S. treasuries with the yield on two-year debt declining -1 basis point to +0.837% while the ten-year yield was down -0.5 basis points to +1.8291%. Both the S&P 500 & Nasdaq 100 declined -0.68% & -0.72% with defensive sectors leading declines, utilities fell -1.73%, as did telecommunications -0.94% and consumer cyclicals -0.94%. The likely reason behind this is that defensive sectors tend to do better in lower growth environments and low interest rates, Donald Trump’s policies will be stimulatory and inflationary which would cause the FOMC to raise rates faster than anticipated.

The U.S. dollar index dropped -0.67% and in a clear risk-off move the Mexican Peso, which is a proxy for the vote given Trump’s stated policies of renegotiating the NAFTA agreement and building a wall, plunged -1.72% shown on the first chart below.

In U.S. data the ISM Manufacturing survey (MoM Oct) increased to 51.9 surpassing estimates of 51.7 and up from 51.5 previously as a result of a pickup in production and hiring. The sub-component of prices paid which is an indication of inflation also beat estimates rising to 54.5 from 53 previously and forecasts for 54.3. Meanwhile new orders was slightly disappointing falling to 52.1 from 55.1 previously.

Two thirds of S&P500 companies have now reported third quarter earnings, of those 71% have beaten earnings estimates while 54% has surpassed revenue forecasts. Prior to the start of this reporting season expectations were for a modest decline in earnings growth of around -1% however consensus is now for around +1.6% growth in earnings for the third quarter, which would end the longest streak of earnings declines since 2015. Any sign of earnings growth will be very positive as it helps reduce the lofty P/E ratios of the S&P500 justifying the higher prices.

Meanwhile the FOMC has entered into a two day meeting where it will discuss monetary policy, there are almost no expectations for any rate hikes at this meeting. What we are expecting in the accompanying statement and by Fed speak over the next month is for Fed officials to further prepare the market for a December rate hike, pending any unforeseen shocks to the economy.
In the U.K. the Pound was flat against the U.S. dollar, two-year government bond yields declined -0.5 basis points to +0.263% as investors sought safe havens while the yield on ten-year debt spiked +3.4% as the weaker Pound has continued to fuel inflation expectations. Meanwhile a PMI survey from Markit economics (MoM Oct) missed expectations of 54.5 with an actual reading of 54.3. The report showed that import prices increased at one of the steepest rates in the past 25 years with 90% of respondents referencing the weaker Pound for the increase in costs. It’s not all bad news though with the weaker Pound responsible for boosting exports while domestic demand remained strong.

In mainland Europe there was no notable economic data releases, the Euro benefited from the weaker U.S. dollar jumping +0.72%. The benchmark for government debt, the German Bund yields, were relatively unchanged at -0.615% & +0.173% respectively. Equity markets were broadly lower, both the Euro Stoxx 600 & DAX declining -1.07% & -1.30% respectively.

Over to Japan the Bank of Japan kept its current monetary policy unchanged at the conclusion of its meeting as widely anticipated. In the quarterly economic outlook report the timing of reaching the inflation, measured by CPI less fresh food, target of 2% was pushed back once again. The forecast inflation in 2016 was lowered from 0.1% to -0.1%, the 2017 forecasts lowered from 1.7% to 1.5% and the 2018 forecast to 1.7% from 1.9%. The 2% target is anticipated to be reached around March 2019 however the market clearly remains sceptical of this, having so far failed to see any significant progress in raising prices. There are limits to monetary policy which lack the tools and authority to impact secular trends that cause deflation in Japan including both a shrinking and ageing population. It will be a long process to implement reforms to deal with these issues in order to mindset of the population around declining prices which have become the norm.

Both the Nikkei & Topix were modestly higher on Tuesday up +0.10% & +0.1% however we can expect equities to be weaker today as a result of the Yen strengthening +0.64% overnight as investors sought safe havens.

In commodities copper futures gained +1% on Tuesday following better than anticipated Chinese data.Manufacturing PMI (MoM Oct) increased to 51.2 from 50.4 and estimates of 50.3. The non-manufacturing survey also gained with a reading of 54.0 vs 53.7 prior as the Chinese economy continues to show further signs of stabilisation. Chinese equities responded well to the news, both the Hang Seng & CSI300 gained +0.93% & +0.68%.

Elsewhere commodities were broadly lower, both Crude Oil & Brent crude finished -0.17% & -0.62% weaker and the Thomson Reuters CRB index closed down -0.25%. The biggest declines were in U.S. natural gas futures which dropped -4.69% as warmer weather expectations for November reduce the demand for heating. Meanwhile precious metals benefited from the weaker U.S. dollar and increased demand for safe haven assets, both spot gold & Silver gained +0.83% & +2.52% respectively.

Locally the Australia was +0.63% higher while the S&P/ASX 200 declined -0.51% shown on the second chart below. The market looks set to extend losses today with ASX SPI200 futures down 36 points in overnight trading.

This follows the Reserve Bank of Australia’s decision to kept interest rates unchanged at a record low 1.5%. The statement accompanying the decision was filled with the regular rhetoric that inflation remains quite low, the global economy is growing at a lower than average pace, the labour market remains mixed but headline unemployment is expected to decrease slowly. Growth and inflation continue to be expected to pick up over the next two years. The RBA will also release its quarterly statement on monetary policy on Thursday providing further details into their forecasts.

Data releases:

• Australian Building Approvals (MoM & YoY Sep) 11:30am AEDT
• Japan Consumer Confidence Index (MoM Oct) 2:00pm AEDT
• German Unmeployment (MoM Oct) 7:55pm AEDT
• Euro-zone Manufacturing PMI – Final (MoM Oct) 8:00pm AEDT
• U.K. Markit Construction PMI (MoM Oct) 10;30pm AEDT
• U.S. ADP Employment Change (MoM Oct) 11:15pm AEDT
• U.S. Crude Oil Inventories (Oct 28th) 1:30am AEDT
• U.S. FOMC Rate Decision (Nov 3rd) 5:00am AEDT