Risk Assets Bounce as FBI Clears Clinton

Daily Analysis - 07/11/2016

Outflows in Haven Assets as Markets React to Closed Email Investigation

As financial markets cue up for Tuesday’s US election, risk aversion assets have reopened significantly lower after the FBI dismissed bringing criminal charges against former Secretary of State Hillary Clinton. Risk assets are rallying following the announcement, with the S&P 500 futures already up over 1.00%, retaking the 2100 level after stocks reversed from one of the worst losing streaks in eight years.

FBI Ends Email Investigation

In what has been a sore spot for the Clinton election campaign, the Federal Bureau of Investigation has determined that it will not bring charges for mishandling classified information against the former Secretary of State. The weekly reopening interpreted the move with a sigh of relief as equities rebounded and Mexican Peso managed to regain some ground lost the previous week. With most polls indicating that the race remains exceptionally close, markets will likely remain jittery and slightly more volatile than normal until the voting results are tabulated on Tuesday night and Wednesday morning. With Clinton roundly regarded as the establishment candidate, a continuation of the status quo is likely to benefit stocks whereas a Trump victory could see stocks fall sharply as gold and the dollar benefit from his more conservative fiscal policy views.

Unemployment Falls Despite US Payrolls Miss

Friday’s official nonfarm payroll figure released by the US Bureau of Labor Statistics showed that 161,000 jobs were created during the month of October, missing estimates of 175,000 new positions and marking the worst reading in 5-months. In a positive development, September’s job creation results were revised higher from 156,000 to 191,000, marking a significant improvement. However, the manufacturing sector continued to give up jobs while gains were mostly related to the health care sector. Additionally, while the headline unemployment figure was treated optimistically, especially after falling back to 4.90%, labor force participation in the United States continued to fall, dipping to 62.80% from 62.90% during September. Nevertheless, according to more hawkish Fed members, current labor fundamentals remain strong, indicating that the possibility of a rate hike before the end of 2016 remains viable. Although the US dollar gave ground after the data, it has since rebounded during the weekly reopening.

Bank of Japan Admits Difficulty Reaching Inflation Target

While data in the week ahead is expected to be relatively limited, with US elections being the predominant focus, the minutes from the September meeting of Bank of Japan officials showed the continued struggle to reach the inflation target. Although the Central Bank was comfortable with rising economic activity, they suggested that quantitative easing did not have the desired impact on the economy. This accounts for their change in focus from asset purchases to interest rate targeting. The results show that targeting yields in bonds has so far been ineffective at restoring inflation which remains a serious concern amongst policymakers. While they believed that it will take longer for inflation expectations to firm up, pushing back expectations of hitting the 2.00% target to March of 2019. In the meantime, the Central Bank’s ability to add to the monetary base has sent the Yen lower against peers, with USDJPY briefly climbing above 104.50.

Haven Assets Lose Appeal

Across the board, risk aversion assets are retreating following the weekly reopening as greater certainty heading into the US election sees risk assets reverse nearly a week of losses. The US dollar is gaining significant traction to the upside after giving up further ground following the nonfarm payroll figure delivered on Friday. The real fireworks have been in precious metals, with gold falling back below $1300.00 per troy ounce as flows to haven assets reverse. Furthermore, the resurgence in the dollar is causing currencies such as the Swiss France to tumble as well, even though the probability of December action on interest rates has fallen from above 70.00% last week to just 66.80% according to the futures market. Silver prices are following gold prices to the downside, remaining on a downward trend as they bump against key support.