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The gloves come off again for the third 'scorched earth' debate

The gloves come off for third and final time, with the focus squarely on the Trump/Clinton showdown.

Capitol Hill
Source: Bloomberg

Clinton’s running mate Tim Kaine has labelled this showdown a ‘scorched earth’ debate. With Trump’s guest of honour being President Obama’s half-brother Malik, it promises to be fiery, intense and brutal affair. But will financial market participants learn anything new about policy, or will the 15% of undecided voters gain greater clarity about their potential chosen candidate? One suspects not, but we can guarantee fireworks - Trump is that unpredictable.

Never in the history of the United States of America has a candidate faced such a deficit in the polls as Trump currently holds, with at least two well-known sites (that model the probability of the outcome) putting an 85-90% chance of a Clinton win. There is even a view that if Trump does get up from here it would have been down to a systematic error in the polling, as literally every poll has shown such a lead for Clinton. But as 2016 has shown us, not just in politics, but in markets too, it can often pay to expect the unexpected. So at 12pm AEDT today, the trading floors tune into the debate and the market should flat line for the ensuing hour or so, with the MXN (Mexican peso) being everyone’s barometer on who is the dominant performer.

AUD moves into the top of its trading range

Politics aside, Asian markets should see another day of a largely uneventful open. That being said, there is still a degree of event risk today, with the key data point being the Australia September employment report, although this is largely a rates and FX play rather than equities. In this report, the market expects 15,000 net jobs to be created, with economists’ estimates ranging from +30,000 to -7,400. Position wise, the market is net long AUDs, but the holdings are hardly extreme. The implied probability of a cut from the Reserve Bank of Australia (RBA) in the November meeting is a mere 13% and clearly next week’s Q3 CPI is the bigger deal for the market. The AUD itself is actually one of the big talking points overnight, with AUD/USD hitting a high of $0.7729 and continuing to hold the 77c handle.

Technically, my bias on the AUD has moved from being one of a neutral stance to now modestly positive. The pair has broken the April downtrend and has moved firmly into the top of the multi-month trading range and thus a close through $0.7750 (the August high) would pose a bit of a headache for the Reserve Bank. One can put the overnight gain on three factors:
1) Oil prices finding good buyers on a monster drawdown (5.24 million barrels) in the weekly Department of Energy inventory report
2) Implied market volatility falling (the US volatility index or ‘VIX’ is down 6.4%)
3) A view that the market expects only a 70% chance of another hike in 2017

Boring is good for China

The EEM (emerging market ETF) had a strong gain overnight and would have been a tailwind for the AUD. Whether this was down to yesterday’s China data is unclear, but being boring is good for China and as long as they stay off the front pages of newspapers, then markets will be content. We all know there are serious debt issues in China, and there are ever diminishing returns for the supply of credit, with the September financing numbers failing to lift either the manufacturing PMI data (at 50.4) or yesterday’s industrial production. However, as long as growth is aligned with Xi Jingping’s ‘L-shaped’ growth trajectory and hitting the year-end target of 6.5%, then all seems well.

GBP/AUD is now trading at the lowest levels since May 2013, if you exclude the 7 October GBP ‘flash crash’. GBP is once again the weakest house on the block thanks to some strong and forceful comments from the Germans, who have been reported as saying they are to ‘shut the door to back channels with the UK on Brexit’. Ie. if you play rough, we will bite back just as hard.

Going deeper into the plumbing of the market, we can see BHP’s ADR(American Depositary Receipt) suggests an open 0.6% higher, helped largely by its exposure to crude. CBA is eyeing a move 0.3% higher. The energy sector was by far the standout sector on the S&P 500, so expect to see a similar feat in Australia.

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