Is Obama a foregone conclusion? Equities, Bonds and Forex have priced a win. If not, where to?

The two year marketing campaign and longest job interview comes to an end today. Polls and markets have priced in a one-sided victory. An upset will bring Oct. type trading conditions back to haunt us quickly. Capital markets and the world seek optimism and stability, the right man in the most powerful job can do that.

The US$ is weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies, in a ‘subdued’ trading range.

FX Heatmap November 4th, 2008

No surprises in yesterday’s US data, it was inevitable that is was going to be weaker. The impact on the market was mute as Capital Markets wait to digest this evening US election. The market must have the Obama premium already priced in. But, not perhaps the magnitude of ‘the win’, tomorrow morning we will get to find out. Yesterday’s US ISM manufacturing index plummeted to a new 26-year low. The factory index fell to 38.9 vs. an expected 41 reading (anything above 50 is expansion). The report raises the risk that the current economic slump will be deeper than the last two recessions as the credit drought and weakening sales force businesses to pare back investments. The American public seeks change, and this should propel Obama to a landslide victory. US manufacturing is definitely entrenched in a deep recession. Digging deeper, most sub-components were as bad as the headline. Production and new orders fell to a level not seen since 1980, as both domestic and foreign demand dries up. Employment also dipped below 40, suggesting we will likely see further 6-digit losses in the months ahead with the unemployment rate moving above 6.5% before the year is out. Most analysts are looking for a NFP print of -250k this Friday. On the positive side, the prices paid index fell to 37.0 from a high of 91.5 just 4 months ago, closing near the previous low level hit during the last recession. With inflation dead, the risk now turns towards deflation.

The US$ currently is lower against the EUR +0.60%, GBP +0.01%, CHF +0.43% and JPY+0.06. The commodity currencies are mixed this morning, CAD +0.08% and AUD -0.24%. The loonie managed to print new weekly highs yesterday, as a positive move in equities managed to convince investors to strap on some risk. Psychologically, investors are happy to have left Oct. and have entered a new month. Combining last weeks gain, the loonie is now only down 11% this quarter. With the credit markets continuing to unclog themselves, renewed optimism is favoring the loonie after printing last weeks technically oversold levels. Interest rate differentials (ECB and BOE), global equities and commodities are expected to provide further support for the currency this week, despite the slew of weaker fundamental data recorded last week. Traders are again being nimble until after today’s US vote and employments report this Friday. The theme of last week, too far, too fast was definitely a concern, traders continue to see better levels to own the currency despite the strength of the one directional play. Now that the Fed eased 50bp, it’s anticipated that the BOC will need to extend interest-rate cuts (2.25%) in the face of slowing economic growth.

RBA governor Stevens was more aggressive than the market anticipated. He cut Australian O/N borrowing costs by 75bp to 5.25% (the 3rd reduction in as many months), amid evidence ‘that global financial turmoil is buffeting the economy’. Stevens also said that the ‘board judged that a further significant reduction in the cash rate was warranted,’ as global economy goes into a recession. But, the currency remains better bid as markets are calmer so far into this new month. Traders continue to look for better places to own the currency (0.6800).

Crude is lower O/N ($62.88 down -103c). Demand side continues to dominate the market. Crude managed to pare some of Friday’s gains as reduced imports by Asian refiner’s reinforced concerns that a demand slowdown is spreading to emerging markets (both China and Korea imported less last month). Euro-land did not help matters stating that the region’s economy probably entered a recession this year and will stagnate next year (They consume 17% of the global energy). Oil fell 33% last month (a record monthly decline), on signs that the economic slowdown in the US and Europe will spread to emerging markets and curb fuel consumption even further (US manufacturing data was also weaker yesterday). The commodity continues to trade close to its 17-month low print achieved last week. Fundamental data combined with the recent greenback strength has investors selling oil contracts on rallies. Expect investors to concentrate on ‘demand destruction’ after last weeks US GDP numbers. Rate cuts last week by the three biggest oil users, the US, China and Japan, has failed to inspire confidence that a recession can be avoided. The threat of global equities advancing and OPEC potentially wanting to meet again before Dec. has only been able to provide temporary support. OPEC indicated that they may call a new meeting if prices fail to react to the -1.5m barrel-a-day output cut it announced last month. Growth fears continue to outweigh any cut in production. OPEC still produces over 40% of the world’s oil, but there are doubts that they can cut much more, the members also need cash, just like most economies do. So do not be surprised to see some members ‘not’ adhere to future cut quotas. Gold has climbed ($729) as the greenback eased against the EUR, boosting the appeal of the ‘yellow metal’ as an alternative investment.

The Nikkei closed 9,114 up +537. The DAX index in Europe was at 5,097 up +71; the FTSE (UK) currently is 4,476 up +33. The early call for the open of key US indices is higher. The 10-year Treasury yields eased 2bp yesterday (3.93%) and are little changed O/N. After the Fed easing last week, the short end of the yield curve had the largest monthly climb since Feb. A contracting economy and stumbling equities has managed to push investors towards the safety of the FI asset class despite an unprecedented amount of US debt being issued. Markets remain very quiet ahead of today’s Presidential voting.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell