Market Overview
The world is waking up to a new US President today and it is not the one that markets had positioned for. As I write this, Donald Trump has just sealed a spectacular victory that will rank as even more surprising than Brexit. At least the Brexit polls were close moving into polling day, however, this will be another election that opinion polls have got enormously wrong and markets are reacting. The impact of this Trump victory is primarily that risk appetite has been smashed and safe havens are benefitting strongly, whilst the dollar is also being sold off.
Equities futures are suggesting sharp losses today. In the European markets, FTSE, DAX and CAC all opened between 2% to 3% lower, but seem to be clawing back some losses with Trump’s acceptance speech, mentioning Keynesian style spending and sounding a touch more consiliatory. Treasury yields have been very volatile overnight but the two year is sharply lower, perhaps with some traders now questioning the viability of a Fed rate hike. Forex markets are relatively less wild, although some of the initial moves have had a degree of retracement.
The yen is the standout performer, with the euro also performer well. It is interesting that sterling is one of the least outperforming currencies against the dollar. However the commodity currencies are all under pressure with the Aussie, kiwi and Canadian Loonie all weaker by over 1%. The big currency pair that will get the headlines though is USD/MXN which has seen drastic selling pressure on the Mexican peso, with the pair shooting up 9% (it was as much as 13.5% higher at one stage).
The volatility will continue throughout the day and there is very little in terms of economic announcements which is probably a good thing as they would be lost amidst the trading in the wake of the Presidential election. The UK Trade Balance is at 0930GMT with goods traded expected to improve marginally to -$11.2bn (from -$12.1bn). The announcement of EIA oil inventories at 1530GMT with focus on the crude oil stocks, which spiked by a build of 14.4m barrels last week. However focus will also be on the Reserve Bank of New Zealand later today at 2000GMT with forecast for a 25bps rate cut to 1.75% (from 2.00%).
Chart of the Day – EUR/JPY
I highlighted the improvement in sterling/yen yesterday and there has also been an improvement in EUR/JPY too in recent weeks. However the move towards a Trump victory has driven safe haven flows and the yen is benefitting against the euro. I was ready to call a big bullish breakout of the range 112/116.35 on a Clinton victory, however that never happened and the range resistance remains in place.
It will be interesting to see the medium term impact of this, as the 9 month downtrend was broken a couple of weeks ago and has since been used as a basis of support, and once more overnight this has been the case with the low at 113.70. This intraday spike low was just below the support around 114.00 and this will be seen as a sign of strength if this support can hold now as momentum remains positively configured on the RSI and Stochastics.
As the dollar has been sold off on Trump moving towards victory, the euro has gained ground. Bursting through the resistance at $1.1143, the euro hit a high of $1.1299, a level not seen since early September. This is still a moving story and it will be interesting to see if the kneejerk reaction lasts as the Europeans and US come in. The technicals do little on a day like today, but the hourly chart shows a minor reversal at the overnight high, with a band of resistance $1.1325/$1.1365. The breakout at $1.1143 becomes supportive with $1.1100 still the longer term pivot. Once the volatility begins to settle down we can begin to see how lasting the impact of a Trump presidency will be on EUR/USD.
Cable had been picking up as it was becoming clearer that Trump was moving towards the winning post. However as Trump has been confirmed as the winner, sterling has dropped off. The weakness in the dollar has not been as spectacular against sterling as it has been against other majors and it will be interesting to see the reaction as the day continues. The hourly chart shows a 200 pip move higher through the night is now unwinding. Not only that, the move could not breach the resistance at $1.2557 as it posted a high at $1.2547.
So this looks to be a somewhat unremarkable move so far. There is a key support that remains in place at $1.2330 which is the old neckline breakout with the support bolstered by the overnight low at $1.2347. The immediate implication of a Trump victory should be Cable higher, however this move is yet to materialise to any real degree and as the market tries to figure out the implications there will be volatility. There could be some further swings as results come in but Cable is yet to make any decisive break.
A Trump presidency is a driver into safe havens and that means yen strength. Subsequently there has been a sharp intraday decline of over 4% on dollar/yen. The pair turned lower once again from the resistance at 105.50 and sharply sold off through all of the October support. It was interesting to see that the low so far has been at the September pivot around 101.15, however if the market “fear” continues then a retreat towards 100 yen could once more be seen.
Quite how the Bank of Japan will react could be very interesting with talk already of moves to prevent significant yen strength. On the technical basis, the trading band from October between 102.55/103.15 could be important today as this could be a significant pool of selling pressure. Technically the outlook is negative again but the markets will move more on sentiment and newsflow today as the implications of the result becomes clearer.
Gold is another asset to benefit from the safe haven flows in the kneejerk reaction to what seems set to be a Trump presidency. The initial move was sharply back through all the resistance at $1300/$1310 to hit a high of $1337. Although this move has been unwound in the last couple of hours, there is still a sense that the safe havens will perform well.. As the European traders take hold there is little reason not to expect further concern and trepidation over Trump and this is likely to help sustain flows into gold. The resistance comes in steps between $1343/$1375 through the succession of lower peaks during the summer. The $1300/$1310 band now becomes.
WTI Oil
A Donald Trump presidency would be perceived as growth negative so the oil price is under pressure. An uncertain and neutral looking candle was posted yesterday on the day prior to the announcement of the new President. The volatility overnight has been elevated and is likely to continue through the day with the EIA oil inventories at 1530GMT. The decline overnight has left a key resistance in place at $45.40 now and this will be seen as a benchmark for a potential recovery.
The decline overnight may have dropped to a multi week low but the key support of the September low at $42.55 remains intact. Furthermore, the bears have not yet been able to decisively grasp control. The hourly chart shows that $44.30 is an interesting level of overhead supply in the past few days and will be watched as a pivot today. For now, oil is holding up reasonably well.
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