Key Market Themes:
- U.S. Presidential election
- GBP value
- Chinese Growth
U.S. Presidential election
This month I received a notification from IG warning that they were raising margins in the build-up to the Presidential election, such as USD margins rising 1%. What does this mean? IG is concerned over the volatility that may emerge from the election, and they want to ensure sufficient capital is kept to one side – preventing large losses occurring. This is because the election result is binary. Either Trump wins or Clinton wins, and the markets may rapidly adjust depending on that result.
At the moment the polls are in favour of Hillary Clinton. Since the leaked video of Trump’s disastrous ‘locker-room talk’ his ratings have dropped substantially. Despite this Trump has, according to Bloomberg, a 2pt lead in the swing state of Florida, which may be significant. However we know from BREXIT that polls are far from 100% accurate.
A Clinton win will ease the markets. The USD and MXN currencies are likely to rally, as will financials. This is because a Clinton presidency signals a continuation of the status quo and un-radical changes in policy.
A Trump win is likely to set the markets swinging. The USD will fall, as will the MXN, over uncertainty regarding economic policy and a movement away from globalization. The MXN is a particular barometer for the election at the moment, as a Trump win will damage trading ties between the two countries. Healthcare stocks will likely perform better than a Clinton win, due to a movement away from public health care (see Obamacare), and less perceivable pressure on pharmaceutical company’s margins compared to Clinton’s policies.
The binary trading accounts have Trump at a 15 sell, significantly lower than the 55 he was at in August. Therefore a £1/pt bet on Trump winning would yield £85 on the upside, a return that indicates a lack of faith in this scenario occurring.
We cannot underestimate the discontent and disillusionment of a vast amount of American citizens, and their willingness to vote for Trump in protest. I would have some positions in place in the event he wins. Short USD may be a good trade, as it covers both sides. In my eyes, whether Hillary or Trump assume presidency, the markets will be rocky towards year-end. A Clinton presidency does not prevent the fact that the Republicans control the senate and congress, therefore I suspect the markets may price in this likely stagnation of economic policy through a weaker dollar. Saying this, the upside is strongly in Hillary’s favour. Long S&P with a focus on financials may be good, as I anticipate a rate rise at year end as well.
The GBP has had a rotten month, making it the worse performing currency in the world this year. It has fallen -6.15% from the beginning of October, with a notable ‘flash crash’ occurring on the 4th of October. The crash was caused by deep tensions over the direction of BREXIT, and exacerbated by algorithmic trading.
The weaker GBP has pushed up inflation expectations in the UK. Recent inflation figures from September show inflation rising +1% vs. August’s +0.6%. As a result GILTS are being sold, raising their yield, in anticipation of higher inflation and thus a rise in the BofE base rate. Rising inflation figures are generally seen as positive in this environment, as we are currently short of the BofE target of 2%. However rapidly rising inflation puts pressure on firms to increase wages, so employees can pay for higher priced goods, which in turn reduces profit margins, dragging down earnings, investment and the stock markets.
Whilst a weaker GBP indicates reduced confidence in the UK economy growing in the future, it has had a somewhat hypocritical impact on the stock market. The FTSE100 has risen +18.6% since its lows post-BREXIT and reached near all time highs this month, at 7,100, as a weaker GBP has increased the book value of profits from some of the largest companies in the UK. Some 70%+ revenues from FTSE100 companies come from abroad. Last year a $1 profit abroad was worth 66p, but is now worth ~80p.
I expect the FTSE100 to continue to rise towards year end on GBP weakness. The FTSE250 is likely to be slightly shaky over GDP growth figures falling from 0.7% to 0.5% following the BREXIT vote, and further weak economic data will push the index downwards. On the other side I anticipate, if there is a continuation of weak economic figures, the BofE may loosen further in December, especially following Carney’s dovish comments regarding a willingness to overshoot inflation. This could further bolster the markets (looser monetary policy raises consumer spending, investment and asset prices), and makes the FTSE100 and 250 look quite attractive towards 17Q1. Past December 2016 I would be weary of potential losses, as the proposed deadline for article 50 approaches in April.
Crude continues to trade above $50 off the back of a suggested deal from OPEC to cut production. The price rises continue to be positive for the markets, as higher priced oil increases the bottom line for energy companies – improving their prospects of paying back debts to banks, hiring more staff and re-investing.
I remain pessimistic on a deal coming through next month. Saudi has made noise regarding a 1mn barrel/day reduction in production, but they appear to be the only OPEC member suggesting they’ll cut. Iran has suggested that they should be producing 9mn oil barrels/day. This is up from the 3.9mn/day they are currently producing, and in my eyes speaks volumes of how the deal will go next month. I expect Oil to remain $50+ until a lack of deal in November, where it will settle back down towards $40 towards year-end. Goldman Sachs maintains a $43 price for year-end.
Chinese GDP growth was quite a notable piece of economic data to emerge this month. The Chinese economy is apparently growing at +6.7% annual rate GDP in the 3 months to September. This is in line with the official government target of 6.5-7%. I say apparently because there are a lot of questions regarding the legitimacy of the figures. For each of the past three quarters China has seen the exact same growth, and people such as James Gorman are speaking out about their concerns over accuracy.
Even if the figures are legit they are still below last years performance of 6.9%, which makes this quarters figures the lowest in 25 years.
We should be more concerned with Chinese growth. The three largest economies in the world are USA (17tn GDP), China (9tn GDP) and Japan (5tn GDP). The U.S. is growing roughly +2% at a push, and Japan has averaged only +0.4% GDP growth for the past twenty years. This means that China, growing at 6-7%, is the main driver of global economic growth. If China begins to slowdown, which it clearly has, it weighs on the health of the global economy. Weaker global growth harms developing economies, which are net exporters of raw materials and make up 40% of global GDP. We mustn’t forget the market turmoil this time last year and in February, which was heavily influenced by China.