It’s been an interesting couple of weeks. The building pressure of an upcoming US election coupled with Brexit uncertainties, central bank policy meetings and false hope out of the energy sector have done enough to rattle financial markets, albeit modestly.
The Clinton vs Trump saga intensified on Monday, following the first televised debate between the two candidates. Clinton was surveyed to have won the debate and an interesting correlation is arising between the US Dollar Index and the positive news surrounding the Democrat candidate.
A shared opinion by many economists is the potential for recession Trump’s economic policies may bring to the US. Whilst policies are for politicians to debate upon, it is to no surprise markets have taken on to that concern, should Trump be elected.
Although economic data factors are the sole strong indicators to judge an economy by, in volatile times such as these, positive expectations out of the Clinton camp are complementing an already boosted US Dollar Index following positive unemployment claims and higher new home sales seen over the past week.
The Mexican peso even reacted positively on news Hillary Clinton had won the debate, complementing the correlation the Clinton camp seems to have on the currency and other market factors directly negatively impacted by Trump’s proposed policies.
To support the above claim, it is known Gold and the Japanese Yen are perceived as safe haven assets in times of turmoil and uncertainty. The strengthening US Dollar Index and subsequent small sell off in the Japanese Yen and Gold during the televised debate sparked a somewhat increase in confidence in risky assets, on increased optimism Clinton may win the election.
The past week’s improved US data, following mixed data over the past month, further supports for sell-offs across both Gold and the Yen as it indicates a heightened probability of a US interest rate hike by the end of the year, a move the US Federal reserve opted against on the 21st September meeting.
An increase in interest rates would cause the USD currency to appreciate, further strengthening the US Dollar Index.
If the uncertainty in the US troubles investors, matters are not much better in the Eurozone or in the energy sector. Spikes in oil prices ahead of renewed talks between Saudi Arabia and Iran this week, repeated the rally bust cycle seen in prior OPEC talks where deals failed to be struck.
The Eurozone for itself faced a slowdown in Service PMI data, primarily out of Germany, the strongest economy in the Eurozone. Furthermore, European financials sold-off, namely Deutsche Bank stocks following Merkel’s reiteration that state aid would not be offered if in need of a bail out.
A positive in my opinion to be taken out of that statement may be the change in policy stance top EU leaders are willing to take in rejuvenating Eurozone growth. The no state aid stance to European banks may have material consequences but less leverage tied in the economic policy decisions taken by EU governments on tackling Eurozone growth.
Besides continued uncertainty around Brexit negotiations, Europe needs a boost in performance sooner rather than later.
The Brexit saga could even spill over to materially impact emerging markets, notably Turkey who were recently downgraded as a result of prolonged terrorism and Brexit uncertainty woes on the country’s own economic performance.
If Brexit and US elections can have substantial material effect on the global economy, then it is imperative that voters make the right decision in the US election and the EU parliament swiftly coordinates Brexit negotiations.
Disclaimer: This article was issued by Mathieu Ganado, Junior Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.