While continuing their recent run of losses, equity markets have commenced the new trading week relatively calm and with minor losses at the time of writing. Following the breaking news late on Friday and ongoing headlines into the weekend over the FBI once again reviewing the emails of U.S. Presidential Candidate Hilary Clinton there would have been concerns over an anxious beginning of the week in trading, although the atmosphere has been relatively calm so far.
With just over one week until the U.S. election takes place, it is very much possible that this will drive the financial market volatility in the week ahead. Generally speaking, the US election should not have a strong impact on the financial markets, however this is an unusual case with this race consistent of what is arguably the two most unpopular candidates in history and we should rule nothing out of the equation.
Could the financial markets react negatively to either outcome?
Although the strongest risks with the U.S. election outcome would rest with Donald Trump being declared as the winner considering this has not been priced into the markets, there is even an argument to be made that Hilary Clinton being declared the winner could result in a more subdued reaction when you bear in mind that this ongoing FBI saga is going to dominate the early weeks of her Presidential reign at the very least.
Political news aside, another reason to believe that the markets might react negatively to Hilary Clinton being declared the winner is also because this would provide further momentum to the rising expectations that the Federal Reserve will be raising U.S. interest rates in December. The U.S. GDP report released last Friday has provided further optimism over the prospect of the Federal Reserve raising U.S. interest rates at the end of the year, which is still seen as a negative for emerging market assets, precious metals and the stock markets.
Gold edging towards $1,270
Gold has so far opened the new trading week with losses slipping from close to $1280 to $1,272 after appreciating significantly as a safe-haven asset on Friday following the breaking news over the FBI and Hilary Clinton. There is still just over one week to go until the U.S. election outcome is confirmed and any sudden turns in the tide towards Donald Trump as the winner should in theory provide encouragement for Gold to climb higher in valuation.
WTI oil below $50
WTI oil looks set to conclude the month of October close to where the commodity opened the month after falling to three-week lows last week. The losses have followed concerns that OPEC will be unable to agree on the unexpected production cut during their meeting in November. This is part of the problem with such an unusual preliminary agreement towards agreeing to a production cut in November, meaning the previous gains were not a result of confirmation of an impending production cut but on the hypothetical circumstance that it will take place.
Any further concerns over OPEC not following through with their previous commitment to confirming a production cut in November will likely result in further selling, while confirmation of what the market is looking for should support prices over the medium term.
GBP/USD struggling below 1.22
Movements in the British pound/U.S. dollar (GBP/USD) currency pair are narrow with limited volatility as the Cable continues to attempt to stabilise around the 1.22 region. There are still clearly no buyers for the pound in this current environment and the recovery of losses seen last week should be seen as exactly just that, a recovery of losses.
While the recent indications that members of the pro-remain contingent before the EU referendum outcome will take part in the Brexit negotiations should slow down concerns that the current government will go too far with their “hard-line” approach towards the European Union in the divorce proceedings, these ongoing headlines over the future of Bank of England (BoE) Governor Mark Carney’s future does present a risk to investor sentiment over the shorter term.
Chinese yuan begins to recover losses
After hitting repeated historic lows against the dollar throughout the past week, the yuan is making an attempt to recover its losses. Although the overwhelming majority of market expectations do now see the dollar/yuan moving towards 7 before the end of 2016, it will not be one-way traffic and we should expect there to be a period of recovery in the currency.
What I find more interesting about the recent recovery is that it has resulted in the Shanghai Composite Index concluding trading slightly lower on Monday. I mentioned last week that investors should focus towards whether a correlation emerges between yuan weakness and stock market strength. We have seen this correlation emerge in the past with the Yen/Nikkei, Euro/DAX and more recently to date with the pound/FTSE 100 and it is possible that history could repeat itself.