The US Election is The Driver in the Week Ahead

US Election, The Driver, Week Ahead, Macroeconomics, fx trader, forex

07 Nov 2016

The near-term outlook for the capital markets will be driven by the results of the US election on November 8. The narrowing of the polls for the presidential contest reverberated through the markets last week. Equities continued the sell-off that began in two weeks ago. The S&P 500 failed to hold on to early gains before the weekend, and its sell-off extended for nine consecutive sessions, something not seen since Carter was President.

Europe's Dow Jones Stoxx 600 has not posted a gain since October 20. The MSCI Emerging Market equity index has risen in only two sessions since then. Last week, both the German Dax and Japanese Nikkei gapped lower twice, including the last session before the weekend.

Bond yields in Europe and the US bottomed in the summer. The increase accelerated in early-October, the tightening of election odds, and the fall in stocks (and oil) helped steady long-term interest rates.

We think that there has been some light hedging and position adjustments, but not on the scale of what likely will be seen on a Trump victory. The wide bandwidth for news and its 7/24/365 nature may make it difficult, even for discerning individuals, to see the forest for the trees, and to mix metaphors, distinguish the noise from the signal.

As investors and decision-makers, it is often required that we make choices without complete information. This is no different. The outlook for next week, if not longer, will likely be a function of the election outcome. The cynics tell us that both alternatives are poor and untrustworthy. Partisans tell us their candidate is superior.

While risk assets were being sold and the security of fixed income was sought, there were two market developments that suggest investors were not so concerned about Trump winning as it may seem at first blush. First, the Mexican peso has been sensitive to the vagaries of the US election campaign. For several weeks, when Trump's comments saw his standing fall, the Mexican peso staged a strong recovery and was best performing currency last month (2.75%). However, as Trump began doing better, the US dollar rallied 5.75% against the peso (October 25-November 3).

The US dollar posted a big outside down day against the peso on November 3. It traded above the previous day's high. It proceeded to reverse and settled below the previous day’s low. There was following through dollar selling of the peso the following day as well. The peso was the strongest currency before the weekend.  It appreciated nearly 0.80%. Despite what may have been interpolated from the equity market slide, if market participants really feared a Trump victory was likely, the peso would have sold-off, or at the very least, underperformed.