The separation of politics and economics is
taken for granted by many, and that makes this current period so
frustrating. Investors, perhaps like many voters, just want to get
the US election over with already. And yet this is a democratic
moment, for all its warts and frailties and flaws. What has unsettled the
markets is not that there are two flawed candidates. Rather investors had grown
comfortable with the idea the Clinton was going to win, and last week’s
announcement by the FBI has made them doubt this.
In this context, the risk is the
product of the credibility of a threat multiplied by the capability. Investors know that regardless of their
personal feelings, Clinton is a known quantity. Trump simply is not. This is not a slight. Agents of change
are by definition more hostile to longstanding practices that have become a tradition. As recently as
mid-October, Nate Silver’s fivethirtyeight.com gave Trump a 1 in 9 chance of
becoming President. Over the past two weeks, and importantly, beginning
before, but accelerating since the FBI’s announcement, the odds of a Trump
victory have tripled.
A Trump presidency has gone from highly unlikely to possible.
Generalizing while acknowledging exceptions, investors have reduced risk.
In the currency markets, this means
an outperformance of Swiss francs and Japanese yen. Gold rallied.
Bottom pickers were already emerging in sterling,
and although its gains are lackluster, it has stopped falling. The
Mexican peso has been particularly hard hit, and the local market holiday on
November 2 did not help matters. But here too the peso had begun
weakening a few days before the FBI revelation. The sell-off in global bonds was arrested, while equities lost ground,
though Europe’s Dow Jones Stoxx 600 sold off each session last week.
Many are trying to guess how the markets will respond if Trump wins next
week. While part of the price action reflects the market is discounting this possibility On
an actual victory, it seems reasonable to
expect a magnitude of the same.
One market judgment that has remained constant over the changing odds has been
the odds attributed to a Fed hike in December. The December
contract has closed +/= one basis point around 0.5% for more than a
month. The Federal Reserve’s statement after yesterday’s FOMC
meeting was little changed from
September’s statement. The case for a hike “continued to
strengthen,” it said, and modified the “further evidence of continued
progress” with the “some,”
seemingly signaling a low bar.
It is not only US politics. Consider the UK politics. It
can explain sterling’s 16% slide (after the recent
corrective gains) this year better than economics. The economy
remains resilient to the political vagaries. In fact, the BOE may revise
higher its growth (and inflation) forecast in the Quarterly Inflation Report
that is released alongside the conclusion
of the MPC meeting.
Today’s reports of the Oct services PMI and Composite PMI were better
than expected and suggested that UK
economy may be accelerating at the start of Q4. The Composite
rose to 54.8 from 53.9. It is the highest since January. The
Composite averaged 51.6 in Q3 and 52.5 in Q2.
The BOE is widely expected to keep rates steady today, with only four of
the sixty survey by Bloomberg expecting a change. It is awkward to
cut rates in tandem with revising up inflation and growth
forecasts.
However, the MPC and Quarterly
Inflation Report are likely to be overshadowed by the High Court ruling on the
role of parliament in the Brexit decisions. Given that parliament is on the whole less enthusiastic about Brexit, the
larger and earlier role for it is understood to increase the odds of a
less-hard Brexit. Whether Brexit hard or not seems to
rest on the trade-off the UK is willing to make, and these are ultimately and
fundamentally political questions.
Politics won’t go away in 2017 either. The focus will turn to
Europe, with Dutch, French and German elections next year.
The US dollar is trading heavily with sterling and the yen leading the
move. Sterling is posting gains for its fifth consecutive
session. It has approached the high since the flash crash
(~$1.2375). The five-day moving average has crossed above the 20-day
average for the first time since mid-September. The next objective is
near a two-month trendline near $1.25. Softer US yields, heavier stocks, and the general anxiety over US polls
has seen the yen strengthen to one-month highs. The dollar found a bid
ahead of JPY102.50. It started week probing the JPY105 area.
The euro only managed to take out
yesterday by a couple of hundredths of a
cent before the momentum faded. Support is seen in the $1.1060-$1.1080 area. The dollar-bloc
currencies are little changed. The Mexican
peso is softer, but the dollar is back below MXN19.50 after poking through in
Asia. It may require the stabilization of Clinton’s
support for the dollar to fall below MXN19.20-MXN19.30.
The US
economic calendar features weekly jobless claims, productivity, Markit and ISM
services, and factory and durable goods orders. The September
data is less important since the release of Q3 GDP. Given tomorrow’s national figures, the weekly
jobless claims will draw little attention.
The October PMI/ISM would be the most important of today’s data, but in
the current context, outside of some limited headline risk, the market’s
attention is elsewhere.
Lastly,
we note that succumbing to both market and official pressure, Egypt has announced it is floating its pound. This will increase the likelihood it secures a
loan (~$12 bln) from the IMF. Egyptian
officials also raised rates by 300 bp. The
pound is expected to eventually converge with the street price near EGP18.00,
though the indicative pricing put the one-year forwards near EGP17.00.