Asia markets - the calm before the storm

The battle lines have been drawn, the votes are being cast and the trading community takes to their desks amid an air of anticipation.

Capitol Hill
Source: Bloomberg

Many will be hoping that we don’t see a re-run of the UK referendum, others will be hoping that we see mayhem, but we should know a little more when the results of the key swing states start hitting the wires as we head into the early Asia afternoon. Forget taking a lunch break, today is all about first-move advantage and reacting to headlines!

Without even reciting the various news polls and Electoral College probability models, the market is the clearest aggregator of news flow. The further 1% gain in the MXN (Mexican peso) shows the market continues to feel Clinton has the edge here, although I thought it was interesting to see that RealClearPolitics (the poll of polls) gave Clinton a 3.4% lead overnight - recall the last six ‘Brexit’ polls averaged 51.7% to 48.3% (3.4 points) for remain!

We are also seeing AUD/USD push into $0.7750, with AUD/JPY (my preferred trade from yesterday) working nicely through both the 2015 downtrend and the June /July double top at ¥81.06. Stay long this pair for ¥84.00. Further gains in iron ore futures (+4.4%) and steel futures (+0.8%) overnight have provided a nice tailwind, as has a slight fall in implied market volatility (the ‘VIX’ at one stage was down 5.4%, but is now 1.2% lower).

The USD has rallied more broadly against the EUR and JPY, helped by comments from Chicago Federal Reserve president Charles Evans, who suggested he sees three hikes between now and 2017. This implies he expects a hike in December and two in 2017, which puts him firmly in-line with the median projections of the Federal Reserve, which they detailed back in its September meeting. He also mentioned that expectations of future hikes are far more important than the next hike. This is something I have been advising for a while, that it’s the pace of hikes that are going to drive investment flows and potential USD moves rather than just ‘will they/won’t they hike in December’. Interestingly, with the positive flow going through financial markets there has been a reasonably strong reaction in fixed income markets and the probability of one rate hike in 2017 has increased to 92% (from 80%). The US ten-year treasury is eyeing the 2% level at 1.92% (+4 basis points on the session).

The S&P 500 (currently +0.3%) has provided Asia with a positive stance, but that can still change if the market doesn’t like what it hears from states such as Florida (polls close at 11am AEDT), North Carolina (11.30 AEDT), Ohio (11.30 AEDT), Pennsylvania (12am AEDT), New Hampshire (12am AEDT), Nevada (2pm AEDT) and the other key battlegrounds. The markets that are a must watch for a reaction to any breaking news (once the actual calls of the individual states are disclosed) for me are USD/MXN, USD/JPY, S&P 500 futures, gold and perhaps US treasury futures. When US markets open the EEM ETF (iShare Emerging market ETF), financials and US healthcare stocks will be keenly watched, given they really need the alignment of a Clinton win and split Congress to find further buyers.

Given the fairly upbeat leads, we are calling the ASX 200 to open at 5277 and a modest gain of 0.4%. BHP looks set to follow bulk commodities higher and its ADR (American Depository Receipt) is up 1.6%. Banks and energy names should be supported as well and Japanese equities should find good buyers too (USD/JPY is above ¥105), helping sentiment around the broader region.

Of course, that can still change, recall what happened in late June and the UK referendum. As soon as Newcastle and Sunderland broke and the markets thought ‘this wasn’t supposed to happen’, then the sky darkened and the markets caved in. This election isn’t perhaps as binary as the UK referendum, but the way financial markets react today could be fairly similar in the sense that if Trump starts picking up the 50/50 states like Florida, New Hampshire, Nevada and potentially some of the more certain Democrat battlegrounds, then the market could get wild. Of course, we mustn’t forget that there is a real battle for the Senate too and it’s 50/50 that the Republicans can hold onto the Upper Chamber.

To many, especially those who have been following the election closely, the result can’t come soon enough so we can all go back to living our lives and focusing on economics, earnings and central bank policy. But for today, we want to know who wins the White House, the composition of Congress and ultimately whether the loser will accept the result!

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