US Presidential Race Sending Volatility Higher

Weekly Report - 06/11/2016

Election Fears Stoke Worst S&P 500 Losing Streak in 8-Years

US equities remained on the retreat last week, encountering increased volatility amid increased fears about the results of the forthcoming elections.  With Republican presidential candidate Donald Trump running neck and neck with Democratic candidate Hillary Clinton as the race enters its final stage, the increased possibility of a Trump victory could see markets continue to react negatively.

Last Week

Although the election continued to dominate the headline news last week, developments pertaining to monetary policy also had a major impact on financial markets.  The Bank of Japan kicked off the week, opting to leave interest rates untouched while maintaining its quantitative easing program and yield targeting efforts.  The BoJ decision was followed by the Reserve Bank of Australia which also announced no change to policy.  Rising inflation is currently preventing further accommodation which may lead to the Australian dollar rising further, putting pressure on exchange rates and the economy.  The FOMC decision was no different, with the Federal Reserve choosing to keep policy steady ahead of the election.  However, when combined with core PCE inflation stable at 1.70% and job creation remaining above 150,000 during October, the case of a rate hike in December continues to strengthen.  Finally, the Bank of England also announced no change in policy, but did stress that further rate cuts were unlikely, especially amid the pickup in inflation and GDP expansion. Adding to concerns about the UK outlook was a High Court decision determining that the UK Parliament must vote on triggering Article 50 to exit the European Union.  The Pound responded positively to the development, surging versus peers.


The Week Ahead

The main upcoming event is the US election with the Presidential race set to conclude this week.  After a long campaign, both candidates are running nearly tied, with Tuesday’s vote potentially sending shock waves through financial markets.  One of the key areas to watch as the results unfold is the USDMXN pair considering it has been a strong proxy for election hedging over the last few months.  Aside from the main event, data will predominantly be coming from China, with reports on trade and inflation set for release.  The trade balance, set to be reported on Tuesday, is expected to rise nearly 25.00% to $51.70 billion from $41.98 billion in September, driven primarily by a narrowing contraction in exports from -10.00% to -6.00% while imports shrink at a slower pace.   Inflation due Wednesday is forecast to show a continued improvement in both producer and consumer price inflation, with PPI estimated to rise to 0.80% while CPI rebounds to 2.10% during October from 1.90% in September.  Aside from China, the other major announcement is an interest rate decision from the Reserve Bank of New Zealand, with the Central Bank forecast to drop rates to 1.75% from 2.00%.


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