Financial Markets Brace for Volatility

Analisi Giornaliera - 08/11/2016

US Election Voting Expected to Result in Brexit-Style Market Fluctuations

With the final day of voting for US national elections ahead, markets are cautious with the presidential candidates currently polling neck and neck. While the market rebound earlier in the week suggests that financial markets are more confident in a Clinton win, voter turnout could change the math. In the meantime, stocks are pulling back modestly following Monday’s spectacular rally.

US Election Season Comes to a Close

After a tumultuous presidential race, the final day of voting for the next president of the United States has added to market anxiety. Even though the results could turn into a non-event, already, market participants and government officials are preparing for the potential fallout. Remarks during the Asian session from Japanese Finance Minister Taro Aso indicated that Japan was prepared to intervene in exchange rates if there was a big spike in the Yen due to volatility in the US Dollar. Equity markets have stabilized, showing small corrections lower as Monday’s election optimism gradually fades. Volatility also dipped, with the S&P 500 VIX volatility index falling -16.88% to 18.71. The retreat in equities has seen precious metals back on the rise, with silver managing to fill in the gap resulting from the weekly reopening on Sunday night.

Chinese Trade Remains Under Pressure

In spite of numerous efforts designed to maintain economic growth, China continues to show worrying trends in terms of trade. The latest trade surplus reported overnight came in at $49.06 billion, missing expectations of $51.70 billion. Although the print was higher than the prior month’s figure, the numbers highlight the continued struggle facing officials as they work to boost fundamental results. Further evidence of this challenge comes from exports which contracted by -7.30% on an annualized basis. While a vast improvement over September’s -10.00% annualized pace of decline, it underlines the difficulty in restoring growth to trade. The continued devaluation of the Chinese Yuan has not shown ideal results for policymakers, with outflows from China rapidly accelerating. Foreign exchange reserves have tumbled to the lowest levels since 2011, falling by $46 billion in October. With more devaluation expected, outflows may continue to rise from current levels.

German Trade Weakens Across the Board

In keeping with global trends, export economies across the globe are suffering from an enduring slowdown in activity. Data released earlier from the Deutsche Bundesbank shows that exports shrank by -0.70% during the month of September while imports also contracted during the period, falling -0.50%. Taken together, the weak trade figures contributed to a surplus that fell from EUR 21.6 billion in August to EUR 21.3 billion in September. Germany’s industrial sector is also feeling the heat after reporting a -1.80% decline during September, marking the steepest tumble in 2-years. Although the economy is still performing very well, especially with unemployment at a 35-year low and inflation that has climbed to the highest in 2-years, should the global trade environment continue to weaken, German fundamentals may follow suit. The DAX 30 is mostly unchanged as European markets open for trading.

Oil Prices Rebound on OPEC Optimism

Following a substantial rally on Monday amid optimism that a deal will be struck between OPEC and non-OPEC oil producers, crude oil prices are trading mostly flat on Tuesday following weaker trade data. However, a deal is not assured, with producers continuing to ramp output levels higher. According to data compiled by S&P Global Platts, OPEC production rose to 33.540 million barrels per day in October. Besides marking 5-straight months of gains and record output from the cartel, Russia has also increased production, indicating that energy markets are likely oversupplied to the tune of 1-2 million barrels per day. While OPEC claims to be making progress towards an output freeze deal, infighting between members still threatens to derail any deal, keeping oil prices under pressure over the near-term. Unless a compromise is formed, Monday’s price gains may quickly reverse to losses.