Standpat FOMC Trumped by US Political Jitters

The single biggest driver in the capital markets is the continued
narrowing of the US election polls. 
The prospect of a Trump presidency and the dramatic changes that could entail
is rattling investors and spurring position squaring.   The dollar is
broadly lower as are stocks.  The
surge in global yields has been arrested.  

Even before the FBI announced a re-opening of the investigation into
Clinton’s emails, Trump has been recovering from the deep hole dug in recent
  However, over the past five days or so, he has recovered further, and the much-watched
has tracked a 10 percentage point
decline in the likelihood of a Clinton victory to now just below 72%. 
Another poll tracker and analysis site, Predictwise, puts the odds at
84% chance, down from 90% over the past two weeks.  

There are two important considerations that will keep investors on edge. 
First, the odds have yet to bottom.  The swing in opinion is a gradual process, and the momentum still is
building.  Second, time is of the essence.  The election is a week
away.   However, there is a significant mitigating factor. The US
president is not picked by popular vote but by an electoral college.  Here
the projections are not as close as some of the national polls suggest. 
Most calculations still see Clinton securing 303 electoral college votes, while
270 are needed.  

The dollar is weaker against most of the major and emerging market
  Among the majors, the exception is the Australian dollar
that has been dragged down by the unexpectedly sharp drop in September building
approvals (-8.7%, more than twice the expected decline).  Between this
decline and August’s (-1.8%), July’s heady 11.5% gain has been retraced.  

Among the emerging market currencies, the South Korean won and Mexican
peso are suffering the most
.  In South Korea, amidst scandal, the
President has appointed a new Prime Minister and Finance Minister, pending
parliamentary approval.  Mexico has been vulnerable to the twists and
turns of the US election.  Local markets are closed today.   The
Russian rouble and Malaysian ringgit are also under pressure, apparently
dragged down by the drop in oil prices.  Oil prices have been sliding
since early-October, but today’s losses have been encouraged by the large (~9.3
mln barrel) jump in US oil inventories, according to API.  The DOE
estimate is due out later today and is regarded
as a more robust figure.  

The eurozone manufacturing PMI was
reported a little above the flash reading (53.5 vs.
  This is the best since
January 2014.  The improvement was due to France and Spain.  France
rose to 51.8 from the flash estimate of 51.3.  Spain rose to 53.3 from
52.3 in September.  For its part, the German reading came in a tough
softer at 55.0 from 55.1, and Italy disappointed by slipping to 50.9 from 51.0
in September.  

The UK reported a stronger than expected construction PMI.  The
52.6 reading represents a small improvement over September’s 52.3 and is the
best since March.  The median expectation was for a small decline. 
The Bank of England meets tomorrow.  Reports today have NIESR forecasting
steady rates now until H2 19, which perhaps not coincidentally may coincide
with the end of Carney’s tenure.  

The euro has extended its recovery to $1.11 and is up almost 0.9% this
  The five-day average is crossing above the 20-day average for
the first time in a month.  The old trendline drawn off the January, June
and July lows comes in near $1.1070.  The euro broke below
near-mid-October and now has resurfaced it.  The next technical objective is found near $1.1115 and then $1.12.

The dollar has been trying to establish a foothold above JPY105 for the
last four sessions. 
The US political jitters and softer US rates have
pulled the greenback toward JPY103.50 now.  We see the next support near
JPY103.20 and then JPY102.80.  

Sterling is trading higher for the fourth consecutive session. 
It has edged above last week’s high (~!.2272) but has not been able to poke
through $1.2300.  If it does, which the intraday technicals suggest is
possible, we see the $1.2325-$1.2350 area as a likely cap.

Equities are under after yesterday’s slide in the US.  The MSCI
Asia-Pacific Index fell a little more than 1%, its largest drop in more than a
month.   The Nikkei gapped lower after reaching six-month highs
yesterday.  European shares are extended
their losing streak.  The Dow Jones Stoxx 600 is off for the eighth
consecutive session, the longest slide in at least five years.   Like
the Nikkei, the DAX and CAC gapped lower at the open today.  

Benchmark yields are broadly lower today.  Europe is seeing a 5-9 bp decline in 10-year
yields, with the periphery outpacing the core.  US 10-year yields are off four bp to slip below 1.80% for the first time
in a week.  

There are two events in North America that may briefly command attention
over the politics today. 
The first is the ADP private sector
employment report.  A small improvement is
Expectations for Fed
policy may be impacted by the electoral outcome
.  If a Trump
victory leads to a dramatic market reaction, as if what is happening now is a
small pre-taste of what could happen, this may become a factor in the Fed’s
contemplation in December.  

The second event is the FOMC meeting.  Barring a surprise, it
should pose only a little headline risk on the announcement.  No one
expects a change in policy today.  There is a long tradition of expressing
its apolitical stance by not grabbing headlines from the election.  There
is simply no precedent for change policy this close to a national election.
Moreover, there is not the urgency to demands overcoming the inertia of
tradition and the logistical challenge of not having a scheduled press
conference.  Last October, the FOMC clearly pre-committed to a December
hike.    While we expect some minor tweaks in the FOMC statement, we
do not expect such an explicit commitment.  If it does materialize, though, it could allow one or more
voting members to drop their dissent.    


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