- Overview of the US election and its impact on the global economic outlook
- US stocks: what could do well/ do badly under a Trump or Clinton win
- US stock indices: S&P 500 outlook
- US election commodities special: what next for gold
- US election FX special: key FX pairs to watch on election night
1. Too close to call: why global markets shudder at US election risks
The markets are starting to get jittery as the world’s most important election this year is finally upon us. While it seemed like a clear win for the Democrats and Hillary Clinton one week ago, now the polls have narrowed and Trump could do what seemed impossible just days ago, and steal victory from under Hillary Clinton’s nose. This makes this election so exciting from the perspective of financial markets, and we expect to see a surge in volatility this week.
Volatility is likely to be the key feature of the remaining days of this election cycle. After remaining subdued in the run-up to the vote, the Vix index, also considered Wall Street’s fear gauge, started to move higher last week, which coincided with a sell off in global stock markets. The Mexican peso, which has been a lightening rod for Donald Trump’s election prospects in recent months, has also come under pressure as a win for Trump could see the US/ Mexican trade relationship crumble.
Historical election upsets and what they do to stocks
Although the markets still consider Clinton the likely winner this week, after all she has a large lead in the critical electoral college votes compared to Trump, there have been upsets before. Way back in 1948, Republican Thomas Dewey was expected to win the Presidential race, only to lose to incumbent Harry Truman. This shock result triggered a 10% fall in the S&P 500 over the next 2 weeks’. (We thank Capital Economics for doing this analysis). Considering Truman was already President, could an unconventional, novice like Trump trigger an even deeper sell-off in the S&P 500 if he beats Hillary Clinton this week? We think there is a good chance that he could.
Perhaps the biggest risk from this election would actually be a result that is too close to call, or a contested victory that would need to go to the Supreme Court. The last time this happened was in 2000 between Al Gore and George W Bush. Ultimately Bush was declared the victor, after a recount in the key swing state of Florida. The final result was not called until December, a month after the actual election. The uncertainty about who had won the election back in 2000 triggered a 5% sell off in the S&P 500 in the week after the election. But in a similar situation this time, the sell off could be sharper. When Bush was declared the winner, Gore immediately conceded, which calmed US stock markets. However, as relations between Clinton and Trump appear to get more toxic by the day, any delay to a candidate conceding the election could add to the downward pressure on risk assets and trigger a deeper sell off in risk assets compared to what we saw in 2000, in our view.
Under this scenario we would expect that a rate hike from the Federal Reserve would be immediately off the cards. After Tuesday’s election we have a raft of Fed speakers, we expect them to give financial markets a steer on where the Fed stands post the result, and whether or not we should expect a rate hike next month. Considering the financial markets are pricing in a 70% chance of a hike, if it starts to look like the Fed will not cut rates on the back of the US election result, then we would expect to see a rapid re-pricing of US asset prices, including a sharp decline in US Treasury yields and the US dollar. It may also trigger a slight boost for US equities, as borrowing costs would stay low for longer, however the extent of the boost for stocks would depend on the political landscape, a hostile landscape would be bad news for US equities regardless of whether the Fed puts the brake on a rate hike.
Elsewhere in the world, the China CPI and export/ import data will be watched closely to see if the economy continues to recover. There is a host of Japanese data next week too. However, we think that domestic economic fundamentals are likely to take a backseat to US election risks this week, especially for the yen, but also more broadly for Asian asset prices, which are likely to be very sensitive to the US election in the coming days.
2. US stocks outlook: Five stocks to sell on a Clinton win, five to dump if Trump wins:
But first, five reasons why presidential-election related stocks to buy/sell are a waste of time
- By definition, lists, like this one, are not exhaustive
- Such lists are not renowned for using particularly scientific for stock picking
- More seriously, it almost goes without saying that stock selection is a very individual process—a big ‘risk event’ doesn’t make potential stock decisions any more standard
- Major political events have lots of moving parts in flux. The US election, which has had more twists than a Stephen King novel, is no exception; lists can quickly become irrelevant
- This list will probably turn out to be statistically irrelevant—the trend of U.S stock market outperformance is well known.
That said we still believe these exercises can be worthwhile because they make us think about the big picture policies that both candidates might bring to the table if they win and which could therefore have an impact on the stock market.
Conversely, which ever candidate loses,, forfeits the right to exert their will on the law-making process. By default, the absence of the views they would have brought to the Oval office will delight some investors whilst putting others off.
Broadly speaking, the risk of a Donald Trump presidency is perceived to centre on ‘protectionist’ trade policies, which purport to favour American labour above workers in other countries, to put the view in the simplistic way that it is often presented.
For Hillary Clinton, the sector which has most to fear might be the pharmaceutical and healthcare sectors given her repeated mentions of allegedly predatory pricing by ‘Big Pharma’.
However, the waters have been muddied in recent months, given that her opponent’s views on trade appeared to have forced Clinton to harden her own views on the subject. She has for instance changed her view on the Trans-Pacific Partnership, having initially been supportive.
Pharma groups already facing operational challenges come into view in light of Clinton’s intention to clamp down on pricing, pointing to shares like Allergan and Mylan. However investors will also reach for the biggest pharmaceutical makers like Bristol Myers-Squibb, Merck & Co.
Additionally, among the year’s worst performers in the sector, Mallinckrodt, can expect little respite in the event sentiment on the industry weakens.
On the bearish side for a Trump victory, our view is that stocks from industries that could be negatively impacted should U.S. trade policy turn more ‘protectionist’ will be in focus. The group occupies 3 ‘sub-spheres’, ‘Global Trade’, ‘Outsourcers’, and ‘US Importers’. Among the largest in these categories, FedEx, Boeing, General Electric, Ford, and Wal-Mart will be considered.
3. US indices outlook: US shares looking for a floor nearby
The S&P 500 is now on course for its longest losing streak since 2008, in the wake of news late last week that the FBI was reopening its ‘emailgate’ enquiry.
Hopes that the index would bounce at a closely watched support comprised of a 38.2% retracement of its most recent strong up-leg have proved to be forlorn.
In fact looking at the chart for the most liquid, tradeable derivative of the benchmark, its futures contract, the market has overshot and is now eyeing the next likely support zone—2064-2091, where that last rising phase kicked off.
The VIX is exacerbating the picture.
Long dormant, the ‘fear gauge’ has recently sprung back into life, and this week tagged its 20 level, which many investors regard as the threshold for almost official market risk aversion.
The wider market’s advance/decline ratio is not helping either, given the 1:5 ratio notched earlier this week.
Investors this week have pointed to what looks to be a test of the index’s 200-day moving average as key.
The threshold, currently around 2077, has been gently pointing higher since June, and continues to do so, suggesting buying momentum would require longer to exhaust, regardless of the deepening reversal.
Should both the aforementioned support zone and moving average fail to support the market, a sharper fall—perhaps to at least this summer’s 1981—could be on the cards.
Source: City Index
4. Asian indices outlook
Next week will be a critical week for Asian stock markets as participants will focus on the outcome of the U.S. presidential election for a potential catalyst to trigger a breakout from its respective medium-term sideways range configurations in place since late August 2016.
Heavily export-dependent Asian countries such as Japan, Singapore and Hong Kong will be the ones that will face higher volatility in their respective stock markets due to the recent campaign pledges made by both presidential candidates as both of them are seeking a more protectionist stance in trade policy.
In order to counter China’s emerging economic dominance in Asia, Obama’s administration has negotiated the Trans Pacific Partnership (TPP) trade pact with Asian nations (excluding China) to improve trade relationship with the U.S via tariffs reduction. Right now, in Donald Trump’s recent trade policy pledges, he labelled the TPP a “disaster pushed by special interests who want to rape U.S.” and therefore would not ratify it if he were elected. Hillary Clinton has also expressed opposition (less stringent terms than Trump) to the TPP (a U-turn as she had helped to negotiate the trade pact when she was the Secretary of the State). Hillary Clinton’s sudden change of “heart” in trade policy is likely caused by the growing popularity of the left-wing Democrat camp led by Elizabeth Warren and Bernie Sanders that adopt a tougher stance on trade policies and financial regulation.
What is interesting right now is that the major stock markets have started to show weakness ahead of the outcome of the U.S. presidential election since last Friday’s sudden announcement from the FBI to reopen Hillary Clinton’s private email case. Based on several polls, Clinton’s initial “comfortable” lead over Trump has narrowed significantly.
Therefore from a behavioural finance perspective, the stock markets have already started to price in at least a 50% probability of a Trump victory (the worse of the two evils) which an actual Trump victory may not trigger a significant decline in stocks post-election.
Let’s us now take a deep dive into the Nikkei 225 (Japan) and Hang Seng (Hong Kong) benchmark stock indices from a technical analysis perspective in order to highlight the key levels for the coming week.
Nikkei 225 – Need to surpass 17500 key resistance
Source: City Index and eSignal
Source: City Index and eSignal )
Key Levels (1 to 3 weeks)
Pivot (key support): 16960
Resistances: 17500 & 18000
Next support: 16340 & 15900
Medium-term (1 to 3 weeks) Outlook
The Japan 225 Index (proxy for the Nikkei 225 futures) is now testing the lower boundary of a medium-term bullish ascending channel in place since the Brexit low of 24 June 2016 now at 16960.
Other technical elements such as momentum indicators are now also mildly positive at this juncture with the daily RSI oscillator that is coming close to a significant support that has coincided with previous bullish reversals seen in price action of the Index and the short-term 4 hour Stochastic has just exited from its oversold region.
Given the current heightened uncertainty that arises from the U.S. presidential election, there is a clear “stubborn” resistance at 17500 (neckline of the basing formation in place since 11 February 2016 low & descending trendline from the major swing high of June 2015) that the Index is required to stage a breakout (daily close above) in order to revive the bullish tone for a further potential rally to target 18000 next.
On the other hand, a break below 16960 is likely to open up scope for a multi-week decline towards the next supports at 16340 and 15900 within a longer-term sideways range configuration (see daily chart).
Hang Seng Index – Testing 22700 range support
Source: City Index and eSignal
Source: City Index and eSignal
Key Levels (1 to 3 weeks)
Pivot (key support): 22700
Resistances: 23850, 24500 & 25400
Next support: 21650/380
Medium-term (1 to 3 weeks) Outlook
The Hong Kong 50 Index (proxy for Hang Seng Index futures) is still evolving within a medium-term “descending range” in place in place since 09 September 2016 high (see 4 hour chart).
Current price action is now right at the lower boundary (support) of the “descending range” at 22700 with positive sightings seen in momentum indicators where the daily RSI oscillator is now resting just above its support coupled with the shorter-term 4 hour Stochastic oscillator that has just exited from its oversold region.
Thus, the Index may now see a potential push up towards the upper boundary (resistance) of the “descending range” at 23850. Only a break above 23850 (daily close is required) may open up scope for a further rally towards the next resistance at 24500. On the other hand, failure to hold above the 22700 medium-term support is likely to unleash a deeper decline towards 21650/380.
5. Asian stock pick: Honda Motors
In the upcoming U.S. presidential election, both candidates have adopted a more protectionist stance in trade policy during their respective campaigns. Therefore, the recent Trans Pacific Partnership (TPP) trade negotiations between Asian nations will be at risk.
One particular U.S. industry in focus will be the automobile business where both candidates seek to protect jobs from major overseas competitor. In the last 12 months, transportation equipment made up close to 40% of the total Japanese exports to the U.S. Therefore, any future changes to the TPP trade agreement with Japan is likely not to be in favour to the Japanese automobile manufacturers because a reduction in tariffs as agreed earlier in the TPP may be rectified.
Therefore, Honda Motor, a major Japanese automobile manufacturer will be the focus for the coming week in our stock pick.
Honda Motor (TSE: 7267) – Further potential downside below 3210
Source: City Index and eSignal
Source: City Index and eSignal
As seen from its technical charts, Honda Motor is now showing signs of further potential weakness below the 3210 key medium-term pivotal resistance towards its recent range support at 2769. A break below 2769 is likely to open up scope for a further decline to retest the July 2016 major swing low area of 2460.
However, a clearance above 3210 is likely to invalidate the preferred bearish scenario for a further up move towards the next resistance at 3785.
6. US election commodities special: what next for gold
Thanks to increased uncertainty about the US elections and a drop in the dollar, buck-denominated gold has been surging higher in recent days to reach north of $1300 by Wednesday when this part of the report was written. The mild stock market sell-off had further supported the perceived safe-haven precious metal. However, the stay above $1300 could be short-lived as we believe the dollar could make a comeback should Hillary Clinton become the next US president. If that were to happen, the Fed will most likely raise rates in December before slowly tightening its policy further in the years ahead. Our underlying bullish fundamental view of the dollar makes us bearish on this buck-denominated and noninterest-bearing yellow precious metal.
On the technical front, the $1300/08 area for gold represents a major resistance zone. Previously, dips were bought here, now rips could be sold around this area. The 50-day moving average, which is now pointing lower, also comes into play in this zone, as does the 61.8% Fibonacci retracement level against the most recent high. There is a potential therefore for the sellers to return here and push gold back down towards the previous support at $1277 and if that level breaks potentially a lot lower over time. On the other hand, if the sellers do not show up around the $1300/08 area in a meaningful way then a continuation towards $1320/22 could be the outcome: here the 78.6% Fibonacci level converges with the bearish trend line.
Source: eSignal and City Index
7. US election FX special: key FX pairs to watch on election night
USD/MXN
With the Mexican peso being inversely correlated with Donald Trump’s campaign performance in recent months (because of his hard-line positions on trade and immigration with respect to Mexico), the USD/MXN is our featured FX chart in this special US elections report. A potential Trump victory is widely expected to be negative for the peso, while a Clinton victory could lead to a relief rally for the embattled currency which could weigh heavily on the USD/MXN pair. The Key technical points to consider in this fundamentally-important time for this pair are as follows:
- Higher highs, higher lows = bullish
- Price above both 50 & 200 moving averages = bullish
- Slope of both 50 & 200 moving averages point higher = bullish
- Resistance at 19.44/60 range holding price down = bearish
- Rally to high at 19.93 failed to hold above prior high of 19.44 = bearish
As noted above, there is no argument about the trend, which is bullish. Usually it is a good idea for traders to go with the trend. However given the elections uncertainty, now could be a good time for that trend to turn. Indeed, the recent technical indications are that the trend has started to point lower. This is clearly indicated by the fact that the most recent rally to the all-time high at 19.93 failed to hold above the prior high of around 19.44. The USD/MXN could now be in the process of forming its first lower high around this 19.44 area and below the next resistance at 19.60. A potential break below the previous low at 18.45 would result in the formation of the first lower low. Until and unless that happens, the long-term uptrend would remain intact. Some short-term support levels to watch are at 19.10, 18.57 and then that 18.45 prior low. If price moves below here, then the sellers could aim for the 200-day moving average at 18.39, followed by the next low at 18.26. Meanwhile on the upside, a break above 19.60 would expose the previous record high for a potential re-test. Further bullish objectives are the Fibonacci extension levels at 20.33 (127.2%) and 20.84 (161.8%).
Source: eSignal and City Index
EUR/USD
The EUR/USD’s short-squeeze rally could come to an end this week and more losses could be on the way next, unless Donald Trump scores a shock victory in the US presidential election race. The long-term weekly chart of the most heavily-traded currency pair shows that price has been making lower lows and lower highs inside its nearly two-year consolidation pattern. So, the medium-term trend is arguably still bearish. This week’s counter-trend rally to the prior key support, now resistance, at 1.1100-1.1150 area could be where the sellers might step back in. This bearish outlook will become invalid upon a potential break above the resistance trend of the bear channel, around the 1.1200 area. Assuming that doesn’t happen, the next potential key support levels, or bearish objectives, to watch include 1.1040, 1.0825/55 and then the long-term 78.6% Fibonacci retracement at 1.0755/60.
Source: eSignal and City Index
