This has definitely not been the most conventional US Election campaign. In fact the word extraordinary comes to mind. There are many parallels with Brexit to be drawn and many of those means that the financial markets have experienced a very different behaviour to years gone by. Investors anxiously try and find value.
The global economy was already in a fragile position leading into 2016 with very low bond yields, very little growth to talk about and yet we have seen some signs of inflation increasing. This has left central banks in a vulnerable position. It has left them little room for manoeuvre (there may also be a little fear of moving.) As Brexit unfolded, investors felt they had little choice but to buy USD assets in the form of US Equities. We have continued to see this leading into the US Elections but at a wavering magnitude – it seems as though investors are becoming a little bit weary and taken some profits off the table. We usually have a massive rally leading into the US Presidential Election. I am taking this latest pullback as a sign of caution that perhaps the rank outsider has a shot.
Traditionally the Emerging Market (EM) feel the pain over a US Election but there are different drivers in the market at present. The closer we get to the US Election, so the stronger EM assets are becoming and generally outperforming developed markets. This is none more evident than the strengthening in the ZAR despite our own political position. This could also be a sign that the market is factoring a possible “surprise” result in the election and spreading a little risk.
During Brexit it was evident how a simple poll could have such a huge influence in the currency market. We are again seeing parallels here, as the Democrats were basking in glory with polls suggesting a unanimous victory. The USD went rampaging on as the market started to see a winner – the safe bet! Come the FBI scandal on Friday and the polls have gradually started to see the result on an even keel. Predictably the USD has had a broad pull back this week. Why you ask? It’s simple – the implausible is back on the table! Just like Brexit, the daily polls are having an effect on the currency markets.
Looking forward, the VIX (Volatility Index) futures are trading at very high levels, and those levels are getting higher and higher. I interpret this as the market factoring in the possibility that the rank outsider will win – why would this volatility increase? A very good question and we will cover this in the next post.
It is important to keep in the back of your mind is that as monumental as Brexit was. The employment of money did not rest long – the market is fickle, and moves on quickly from this sort of events. The next 10 days could be vital but eventually markets will move onto something else.
