To safety we run

A sea of red engulfed the US and European equities market overnight, while the surge in the fear gauge, the VIX index, has stolen the headlines this morning. 

US Elections
Source: Bloomberg

Overnight we saw the S&P 500 index closing lower for the sixth consecutive session down 0.68% and weighed by the real estate and utilities sectors. The optimism stemming from China’s better than expected manufacturing PMI figures on Tuesday were really limited to markets in the immediate region, unable to counter the anxiety ahead of the upcoming elections.

Meanwhile the dollar index plummeted despite the set of US data exceeding market consensus. At sub-$97.800 levels, the dollar index retreated more than 0.7% on Tuesday, signalling the risk aversion present in the market. Gainers against the dollar had really been the JPY and CHF. USD/JPY was last seen down approximately 100pips to $104.00 levels. This may not spell good news for the Nikkei which had been playing by the currency story lately. Holding an inverse relationship with the dollar, gold has rallied as well to trade firmly above the 200DMA of $1275.67.

In addition to the above, crude oil prices remain in bear market territory, adding to the weak leads for Asia on Wednesday. WTI futures declined to a 1-month low at $46.27/bbl when last checked. One would recall that last week’s API data, showing an increase in stockpiles, had partly set the direction for the fall in crude oil prices despite a drawdown in inventory shown in the US DoE report. The massive 9.3 million build-up in inventories in the latest API report has just further dampened the oil outlook. A confirmation of inventory build-up in this magnitude – the latest market consensus is for a 2.0 million barrel increase in inventories – for the DoE report may just set oil prices another tad lower.

With the only focal point of the markets on the US elections at the moment, I would certainly like to draw some attention to the Fed. The Fed FOMC meets over the two-day period with interest rate decision due 18:00GMT and no change is expected by the markets. Weak but stable growth appears to be the current view on the US economy. While there may be criticisms that similar to last year, the Fed is very likely to hike rates into a weak economy, my concern would be that any further delays would really reduce the credibility of the Fed in addition to creating uncertainties in the market.

Safe to say, the market is currently pricing in one hike before the end of the year though we do have the event risk from the Presidential elections. With the heightened focus on the elections, we would really like to look forward and consider the two questions that may emerge at the top of our minds post-elections – how would the growth be like under the new administration and how will the Fed communicate their intentions in the new year. These are some questions that could receive some attention in one week’s time and until then, safe havens indeed appear welcoming.  

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