Originally published by Rivkin Securities
Global markets switched to risk-on on the eve of the US presidential election on Monday following the announcement by FBI Director James Comey that no charges would be sought after reviewing additional emails linked to Hilary Clinton. That revelation gave Hilary a bump in the polls overnight, a national polling average conducted by the New York Times suggested Clinton extended her lead to 46.0% vs Trumps 42.9%. A separate poll by website FiveThirtyEight.com suggested Clinton’s lead extended to 48.7 from 48.3 on Friday while Trump remained unchanged at 45.4% and a final national average poll by the Financial Times also has Clinton leading by around 3 points.
Having been sold-off heavily over the past fortnight along with Clinton’s lead in the polls, global markets rebounded on Monday in a clear risk-on move. The Mexican Peso, which weakens when Trump gets a boost in the polls, strengthened +1.88% against the US dollar. Meanwhile the US Dollar surged against major peers, up +1.36% against the Yen, +0.56% against the Swiss Franc, +0.84% against the Euro and +0.91% against the Pound. The US Dollar Index was also +0.74% higher. The first chart below shows the performance against both the Peso & Yen, which are shown inversely.
Some of the hardest hit were precious metals spot Gold and Silver which are seen as a safe haven, spot gold fell -1.73% & spot silver was also -0.98% lower. Other assets which are seen as safe havens also sold off, the yield on two-year U.S. treasuries rose +2 basis points to +0.8178% as did the ten-year yield, up +4.3 basis points to +1.8243%.
Equity markets globally rallied, both the S&P 500 & Nasdaq 100 rose +2.22% & +2.43%. In Europe the STOXX 600 jumped +1.53%, as did the Euro Stoxx 50 +1.85%, DAX +1.93% and FTSE 100 +1.70%. In Asia equities were also broadly higher, the Nikkei 225 closing +1.61% stronger, as did the Hang Seng +0.70%, KOSPI +0.79% and S&P/ASX 200 +1.35%.
It’s difficult to say what will happen today, perhaps the most likely outcome is markets pause as investors wait the final day before the election results begin to flow in. So we’ve decided to take a look at the seasonal impact on US equity markets (measured by the Dow Jones Industrial Average) following elections, firstly between Election Day to Inauguration day and secondly from Inauguration day over the first 100 days of the new presidency.
Between election day and the inauguration day over the past ten presidential elections, US equity markets on average gained +1.32% with seven out of the ten years being positive shown on the first table & chart below. The strongest performance came after the inauguration day during the first 100 days of the new presidency, with nine of out the ten periods returning a positive result averaging 5.98% shown on the second table & chart below. While the past is no guarantee of future performance, especially with someone such as Trump who is seen as more unpredictable, this does provide us with some insight into what we might be able to expect.
In the short-term, we can only provide our best guess as to the reaction in markets. Should Trump clinch the presidency expect a flight to safety, the US dollar is likely to underperform against major peers such as the Yen, Swiss Franc and Euro, although it should comfortably outperform the Mexican Peso. Emerging market currencies will come under pressure as a result of Trump’s protectionist policies, think the Brazil Real, Russian Ruble, Indian Rupee, Indonesian Rupiah and Turkish Lira. Shorter dated US treasuries will initially benefit from the flight to safety along with treasury inflation protected securities while longer-term bonds sell-off on higher inflation expectations. Equity markets should have an initial knee jerk reaction lower and fossil fuel commodities perform strongly.
A Clinton victory would likely the see exact inverse of what is discussed above, safe havens sell-offs as the market switches to risk-on, equity markets should broadly rise while bonds decline. Emerging markets should outperform while major pairs underperform against the US dollar.
Elsewhere commodity prices also benefited for a risk-on sentiment despite the stronger dollar. Both Crude Oil & Brent Oil were +1.84% & +1.34% higher respectively following comments from OPEC’s Secretary-General Mohammed Barkindo at an oil conference in Abu Dhabi. Looking ahead to OPEC’s formal meeting in Vienna at the end of this month, Barkindo stated that Russia was on board with OPEC’s agreement to cut production having “heard from the highest quarters in Moscow that Russia is on board”. Copper prices surged +2.12%, as did Natural Gas +1.70% and a broad measure of a basket of commodity, the Thomson Reuters CRB index gained +0.54%.
Locally we can expect to slightly extend Monday’s gains with ASX SPI200 futures up +13 points in overnight trading.
Data releases:
· Australian NAB Business Confidence (MoM Oct) 10;30am AEDT
· Chinese Balance of Trade, Exports & Imports Approx. 12:00pm AEDT
· German Industrial Production (MoM & YoY Sep) 6:00pm AEDT
· German Trade Balance & Current Account (MoM Sep) 6:00pm AEDT
· U.K. Industrial & Manufacturing Production (MoM & YoY Sep) 10:30pm AEDT
