The fact that oil prices are in freefall will not help clarity here given the Federal Reserve’s (Fed) overnight statement was fairly upbeat on the recent rise in market-based inflation expectations (the bond markets inflation expectations over five years has increased from 1.44% in June to currently sit at 1.91%), but this move in inflation expectations has been largely driven by the move above $50 in the barrel.
The Fed have also signalled they are slightly more concerned with household spending, which again may be impacted if the financial markets throw a wobbly on confirmation of a Trump victory. One suspects it could be even worse (and actually fairly likely) if one of the candidates disputes the validity of the election, potentially opening a ruling by the Supreme Court, which of course either Clinton or Trump would need to accept. One suspects this election could take a bitter turn and the financial markets would not know where to look. In this environment, the probability of a December rate hike would fall from the current 78% being priced into the interest rate markets to closer to 20-30%.
So a hike in December is still the base case, however there is this mountain of uncertainty that could derail the Fed’s thinking. Still, given the Fed are not a political organisation, it would mean the markets and overall financial conditions would push them to keep rates on hold. Janet Yellen would feel it very unwise to be hiking when equity prices are falling, corporate credit spreads are widening and volatility is rising, that could be one way to push the US economy into a recession. One suspects this may have also played into Boston Fed president Eric Rosengren thinking and after dissenting in the September meeting (on grounds of financial instability) and calling for a hike, he now feels rates should be on hold.
The move to take risk off the table continues, with strong moves lower in European stocks (the Stoxx 50 index fell 1.4%), not helped by a higher EUR/USD. The S&P 500 is down for a seventh day and eyeing the record for consecutive down days set in 2008 at eight. So US markets are nearly in uncharted territory and it doesn’t feel like we are at that point of peak negativity and time for contrarian positions. US crude is a further 1.7% lower from the ASX 200 close, falling to a low of $44.96, after what can be described as a tidal wave of oil dropping onto Cushing, Oklahoma, with the weekly government inventory report showing a massive 14.4 million barrel increase. That is the biggest increase in the weekly inventory report since records began in 1982!
The market continues to find solace though in the JPY, CHF and gold which seem to be the places to hide and ride out the US election. Interestingly, Paddy Power (the bookie who recently paid out on a Clinton win) said overnight that 91% of their last minute flow was on Trump. William Hill said words to this effect a few weeks back and that it was the sheer weight of money that was creating such certainty behind Clinton’s odds. But in a similar vein as the UK referendum, the absolute number of bets was on Trump. The interesting thing (if we look at the RealClearPolitics average poll chart) we can see isn’t just that Clinton is losing ground, but the polls turning for Trump.
Turning to the Asian market open and it looks as though we are going to see another negative start. SPI futures are only down 16 points and eyeing a test of the 14 September low of 5137, and I would expect a bounce from this level. We see the ASX 200 cash market testing and potentially opening below 5200 this morning, with all eyes on ANZ’s results this morning, although they’ve been in the news quite a bit with their sell down of Asian retail banking and wealth operations. Material names have strongly outperformed of late, but there was some rotation in safety of staples, telcos and utility names yesterday and the combination of a 1.1% drop in iron ore futures overnight and a sharp drop in oil should see material and energy names lower on open. Gold stocks are looking good in this market.
We have reached a point where there is a buyer’s strike, where money managers have reduced their risk, increased cash allocations within the portfolio and are happy to ride out this mini storm of uncertainity. This is a perfect breeding ground for short sellers who love the combination of uncertainty and lack of bids.