The market has been happy to unwind a number of Trump presidency hedges and the prospect of a ‘Brexit’ styled election surprise seems quite remote now. The canary in the coal mine has been the Mexican peso and since 26 September we’ve seen the MXN appreciate around 5% against the greenback, although that is more a reflection of short covering. One suspects there is still some downside in USD/MXN, although the recent broad USD strength is curbing the move lower.

The USD index has broken the November downtrend and is eyeing a break of the July highs, a fate that will no doubt attract much attention from the momentum and trend following FX crowd. There is no concern from USD bulls around the election, although one suspects we could already have broken the July highs if Trump hadn’t had the worst two weeks of any presidential campaign….ever! Trump’s policy of a tax repatriation window for US multinationals and a strong disdain for the Feds easy money policy may never come to fruition. The market is focused intently on the prospect of a December hike, with the probability approaching the 70% level that the Fed would assess as a level the market is comfortable with a hike. One suspects that with the odds so stacked against Trump traders are feeling politics won’t play into the Fed’s psyche going forward.

US equities will now be more closely focused on Q3 earnings and if we assess either the market internals (the percentage of firms above their 20- or 50-day moving averages), or the trend/price action in the S&P 500 (daily chart) we can see that the market is about as neutral a set-up as you are likely to see. Patience is required before forming a new bias other than to range trade for now.

Is the catalyst for a break of the 2180-2140 range going to come from the election? I suspect it will be driven more specifically from moves in the USD, while the 40-day correlation coefficient between crude and the MSCI all-world index is 0.86 – basically moving in lockstep. I don’t see the US election having a great impact on the oil market.

So with US equities, I would be happy to buy the upside break (on a closing basis) through 2180, while increasing bearish exposure through 2140 and subsequently adding through 2116. See chart below.

S&P500

US and developed market fixed income is selling off nicely at the moment, in line with the greater probability of a December hike. For retail participants, I have been urging traders to look at shorting the TLT (iShares 20+Treasury ETF) on a close through 133.04 (the September low). I don’t see an all-out collapse in prices (rise in yields), as the Fed will be super gradual in reaching the terminal rate. But the bond bears seem to be getting traction. Higher oil is pushing inflation expectations higher as well, which is also having a strong hand in forcing yields higher.

Again, unless we see Trump getting the Oval Office and the Republicans controlling both the Senate and House, which seems highly unlikely we will we see traders piling into bonds on the idea of increased financial market volatility, uncertainty, and general risk aversion.

TLT

I also like buying USD/JPY given the move recently in real rates (in favor of USD’s). Technically the break of the longer-term downtrend and hold off the September high (now support) is key and I would be long in small size, adding to the position on a break through the August high of ¥104.32.

 

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