Market jitters emerge as first US election results come in

Stock futures volatile while gold loses ground
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Tuesday 12:50 GMT. Markets were rattled as the first results of the US presidential election were called, settling the stage for a late night on Tuesday.

US and European equities had put in relatively confident performances earlier in the day, and the Mexican peso extended Monday’s rise, as markets awaited the outcome of the US election.

There was a growing shift during Tuesday’s session towards a “risk-on” bias elsewhere in the markets, as voting took place in what is widely regarded as one of the most divisive US presidential contests in history.

Opinion polls have given Hillary Clinton a slender lead, and some real-time election projectors indicated a good showing by the Democratic candidate, fuelling investor bets that Republican candidate Donald Trump would be defeated.

Kit Juckes, strategist at Société Générale, offered a succinct description of the impact on markets of the possible results. “Mr Trump is ‘risk-off’, Mrs Clinton is ‘risk-on’, and markets will move whatever the result, or more particularly, whatever the results in Florida and North Carolina,” he said.

The S&P 500 index recovered from an early dip to close 0.4 per cent higher at 2,139, clawing back the last of last week’s losses.

As the first results came in, Mr Trump won Indiana, Kentucky and West Virginia, as expected, according to the Associated Press, with Mrs Clinton picking up the solidly Democratic state of Vermont.

In response, stock futures were volatile and gold vacillated from a gain of 0.6 per cent and a loss of the same amount.

There was a sense of wariness about the possibility of a “Brexit-style” shock in favour of Mr Trump, particularly given an elevated proportion of undecided voters. The CBOE Vix volatility index, considered a gauge of stock market stress, fluctuated during the day but was still elevated at 18.74 by 5.30pm in New York.

“When the numbers are as close as this, and when we are seeing an anti-establishment movement that perhaps behaves differently to traditional election voters, then the outcome is more uncertain,” said Jim Reid, macro strategist at Deutsche Bank.

While the floodlights were on the presidential race, the outcome of the Congressional election was also key to the post-election market psychology.

“US equities have discounted a very clear outcome — a Clinton victory, Republicans holding the House and Republicans holding the Senate,” said Nicholas Colas, chief market strategist at Convergex. “You only have to run that checklist for equities to work from here. If the Republicans don’t hold the Senate, that will be the conversation tomorrow.”

On Monday, the US equity benchmark had snapped a nine-day run of losses as it leapt 2.2 per cent, its biggest one-day rise for eight months, after the FBI cleared Mrs Clinton of email wrongdoing for a second time.

Across the Atlantic, the Euro Stoxx 600 index rose 0.3 per cent as it continued to rebound from a four-month low. The Xetra Dax index in Frankfurt added 0.2 per cent, while the FTSE 100 in London outperformed with a 0.5 per cent gain. The Nikkei 225 in Tokyo ended barely changed.

The dollar had a broadly firmer session, particularly against “haven” currencies such as the Japanese yen and Swiss franc. The dollar climbed 0.7 per cent to ¥105.2, and gained 0.4 per cent against the franc to trade at 0.979. The euro slipped 0.1 per cent lower to $1.103 on Tuesday, while the pound was off 0.1 per cent at $1.237.

“We think the yen would be the clear winner in the case of a Trump victory,” said Elsa Lignos, senior currency strategist at RBC Capital Markets. “But the yen would also outperform if the election outcome is uncertain or if Mrs Clinton wins but Mr Trump is not quick to concede.”

Emerging market currencies were also winners from the cautious but growing market conviction that Mrs Clinton would win the presidential election, especially the Mexican peso that has become a widely-watched gauge of Mr Trump’s fortunes. The peso rallied 1.5 per cent to a two-month high of 18.30 pesos per dollar.

Meanwhile, the Canadian dollar rallied 0.6 per cent to trade at C$1.329. While the peso has become the biggest market bellwether of the perceived chances of a Trump victory, the Canadian dollar could also have “a lot to lose if the Republican candidate romped to victory,” said Jane Foley, currency strategist at Rabobank.

“Mr Trump has threatened to end multinational trades and impose a 35 per cent tariff on Mexican imports, even if this means the end of the North American Free Trade Agreement with Mexico and Canada,” she pointed out.

Further reflecting the renewed “risk-on” stance of the markets, government bond prices and gold lost ground. The yield on the 10-year Treasury note, which moves inversely to its price, was up 3 basis points at 1.86 per cent.

The 10-year German Bund yield rose 3bp to 0.19 per cent, while that on the 10-year UK gilt rose 3bp to 1.23 per cent.

Those moves came as Fed fund futures moved to price in an 84 per cent probability of the US central bank raising interest rates in December, up from about 76 per cent on Friday, according to Bloomberg calculations.

“This is a sign that markets are confident that Hillary Clinton will win the US presidential election,” said Kathleen Brooks at City Index. “A win for Mrs Clinton is considered a green light for the Fed to hike rates, while a win for Mr Trump could put the brakes on a rate hike from the Fed in the medium term.”

A soft showing for oil prices had relatively little impact on broader market sentiment. Brent, the international crude benchmark, fell 0.7 per cent to settle at $45.81 a barrel while US West Texas Intermediate was 0.1 per cent lower in late trade at $44.83.

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