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The combination of a 1.7% sell-off in the MXN (Mexican peso), strong rally in CHF and JPY, and the drop in the implied probability of a December hike from the Federal Reserve (Fed) to 68% paints a clear story. We can see the concern in the stock market where the S&P 500 has closed just below key support between 2116 to 2114 (marking the 38.2% retracement of the June to August rally and 13 October low). This development suggests the bears have the upper hand, with the buying drying up and funds keeping their cash deployed for more certain times. This all suggests a break of 2100 is a higher probability.
On a brighter note, we did see the Dow close above 18,000, having traded as low as 17940.
These dynamics also mean increased implied volatility in financial markets - the 8% spike in the ‘VIX’ index to 18.57% is testament to that. The US markets are finally showing some much-needed life and this pick-up in volatility will probably be with markets until we understand the results of election, and how harmonious Trump’s relationship with the Fed may be. It’s no surprise to see the USD sold fairly aggressively (the USD is down 0.7% - the worst day since 6 September) as money moved out of the greenback and into CHF and JPY, on the lower chance of a Fed hike in December. However, these USD outflows also come at a time when US data overnight was pretty robust, with good ISM manufacturing (51.9) and vehicle sales data (17.9 million). This has ultimately kept US fixed income largely unchanged, despite the reasonable strong risk aversion. Silver and gold are also looking quite lively, although gold has found the 50% retracement of the September to October sell-off at $1292 hard going.
It’s not all doom and gloom though, with commodity markets in a euphoric mood. While precious metals are being sought as a hedge against political angst (and USD weakness), we continue to see life in iron ore futures (+1.2% in overnight trade), coking coal (+3.1%), steel futures (+1.6%) and zinc (+2.7%, to a new five-year high). Iron ore futures have pushed higher for eight consecutive days and when iron ore trends, it does so like a thing of beauty. Even oil prices are flat from yesterday’s ASX 200 close. My preference in metals/bulks space is zinc. The daily chart looks outstanding and while we can point to the technical set-up, we can find inspiration from the compelling supply/demand dynamics, higher input costs from coking coal and goodwill towards China’s economics. One for the radar.
Turning to the Asian equity open and it promises to be a tough day for the Japanese market, with our call for the Nikkei at 17250 (-232 points or 1.1%), not helped by USD/JPY pulling to ¥104. The ASX 200 is likely to open at 5258 (-32 point or 0.6%), with materials likely to outperform and banks to subtract the bulk of the index points. Volumes should ramp up today, as they did in the US, where S&P 500 volume was 23% above the 30-day average. Goldman Sachs recent call to put NCM on its conviction buy list seems a quite inspired move as gold stocks are coming into a bit of a purple patch. This is where I would be hiding if I were trading equities until we find some answers to the questions. Many of these will only be partially answered on the afternoon of 9 November.
We are not quite at the point where we need to think about canned food and underground wood bunkers, but we are once again being schooled in understanding the dynamics politics plays on markets, which is despite all the thoughts about central bank policy changes, improving inflation trends and ever-changing economics, politics dominates markets above all else.