Election Uncertainty & US Rate Hike Expectations Weighing On Equities

Nov 03, 1:33 pm
Equities_Stock Exchange

US Elections Looming

Heightened uncertainty regarding the US election has weighed on risk appetite this week fuelling a sell-off in risk assets. The S&P500 has fallen to new 5 month lows as traders unwind speculative positions amidst fresh market volatility.

The key driver behind the shift in sentiment has been the rebound of support for outsider Republican Presidential candidate Donald Trump. Trump has reclaimed lost ground this week benefiting from reports that the FBI have reopened an investigation into Hilary Clinton’s use of a private email server to send and receive sensitive government emails.

Trump has constantly Clinton’s criminality regarding the action and has seen a fresh surge in support as the media take hold of the story. Key swings states like North Carolina have seen a narrowing of Clinton’s lead. Markets are wary of the prospects of a Trump presidency due to the extreme policies proposed by the Republican candidate which many analysts fear will have damaging repercussions for the US economy due to trade wars with key partners such as China.

Indices Under Pressure

Equity indices have been under additional pressure over recent weeks as US rate hike expectations have continued to rise. The September FOMC gave a clear signal that the Fed were moving ever closer to a rate hike with many members noting that the decision to keep rates on hold was a “close call”. Following that meeting we have seen a raft of Fed commentary supporting the idea of a rate hike with Fed’ Williams and Dudley both forecasting the prospect of a 2016 rate hike.

The November FOMC this week added further expectation that the Fed will raise rates this year. Whilst the statement was only marginally updated from the September statement the Fed essentially reiterated that provided the economy stays on track then a rate rise will be appropriate this year.

Key changes to the statement which have added pressure to equities today were related to:

Labour market conditions:  Fed noted that “job gains have been solid” – updated from “job gains have been solid, on average”

Inflation: Fed noted that “Inflation is expected to rise to 2% over the medium term” – updated from Inflation is expected to remain low in the near term”

S&P500

SPX500Daily

Having broken down through the rising bullish trend line from year to date lows, the S&P500 has now broken down through key structural support at the September low of 2106. This bearish technical development indicates further downside in the index.

Price is currently stalled at a test of the 50% retracement from Summer lows. With the 61.8% retracement coming is as next key support at 2067.Sellers will be looking for a potential retest of the broken September low to act as resistance for a renewed downside turn.

DAX

GER30Daily

In Europe the DAX has been under pressure too dropping from a year to date high of 10829 to the current low of 10366., breaking down through the short-term trend line from summer lows.

European equities have faced their own challenges over recent weeks as markets have begun to question the prospect of ECB tapering. At their recent ECB meeting the bank noted that they had not discussed the end game for QE, but when questioned about whether QE was likely to end abruptly, ECB Chief Draghi noted that this was highly unlikely.

Indeed, recent EuroZone data has continued to print positively indicating a firming of the recovery. Recent October PMI data further increased markets awareness of the likelihood of ECB tapering becoming a more prominent theme leading to further selling in equity markets. Traders now await the December ECB meeting for the bank’s update on the path of QE.

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With over 6 years’ experience analysing currency markets, James is now a well-known industry analyst focusing on price action trading and fundamental drivers. Beginning as a private retail trader, James developed a strong interest in understanding the fundamental aspect of the market before pursuing technical trading capabilities which he now uses to identify opportunities over a short-term horizon. Alongside his market experience, James is also IMC certified having achieved the qualification to help further his understanding not only of the markets but the industry as a whole. James has a strong interest in both fundamentals and technicals and uses both forms of analysis in generating and executing trade ideas, with trades generally lasting from a few hours to a few days.