The Overnight Report: Clinton Confidence

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By Greg Peel

The Dow closed up 133 points or 0.7% while the S&P gained 0.6% to 2159 and the Nasdaq rose 0.9%.

Ebb and Flow

The ASX200 plunged 60 points on the opening rotation last night, as the computers went wild on the possibility of a European bank going to the wall. As is so often the case in today’s trading environment, humans then stepped in to steady the ship. But there was not a lot of enthusiasm to start buying ahead of what was arguably the most anticipated presidential candidate debate in history.

The debate kicked off at 11am Sydney time and immediately the ASX200 began to rally. The index then flattened through the course of the one and a half hour ordeal (can you imagine having to sit through Turnbull/Shorten for a full 90 minutes?) and thereafter rallied in a second wave. The opinion is Clinton emerged a victor, or more realistically, an under-prepared Trump was a clear loser.

The rally back did not so much represent the opinion of Australian investors on the matter but rather what was going on in offshore markets at the time. The Dow futures rallied, suggesting a stronger session for Wall Street last night. The Mexican peso soared, suggesting forex traders had clearly given the debate to Trump.

What we can conclude from last night’s action is that global financial markets want a Clinton victory. By default, market capitalists are typically Republican supporters. But The Donald is not your average Republican and even if his fiscal policies are more appealing to Wall Street, the thought of Trump holding the launch codes is just too frightening. Hillary Clinton has very few fans on Wall Street, but it’s better the devil you know.

So yesterday afternoon the European banking crisis was put aside. The local financials sector ultimately closed down 0.8% nonetheless to provide the biggest market cap influence in the final 0.5% market loss. What we didn’t see was an offset from the energy sector which we might have assumed given the oil price had rebounded. But again, our own time zone came into play.

With the OPEC meeting yet to be held, Iran declared it had no interest in freezing production. Hardly a surprise, given Iran has said all along it will only consider a freeze once it has returned to pre-sanction production levels. So the meeting will again be a dud, but there is scope for an agreement to be reached at the regular OPEC meeting at the end of the year, assuming that by then Iranian production will have reached the target.

Oil futures fell on the news and as a result, the local energy sector closed down 0.8%. All sectors finished in the red yesterday bar healthcare, which jumped 1.3% thanks to ever popular CSL.

Status Quo

As all commentators are noting, there are two more presidential debates yet to be held and a vice presidential debate to boot before America goes to the polls. History suggests many an undecided American voter makes up their mind after the first debate, but history also shows winners of the first debate do not always become president.

Few on Wall Street like Obamacare, Dodd-Frank or the TPP but The Donald is just too much of an unknown factor and the greatest enemy of markets is uncertainty. A Democrat victory implies maintenance of the status quo, and while not encouraging, it’s better than the alternative. So sayeth the market.

Realistically, last night’s rally on Wall Street occurred before the market opened. The Dow futures had rallied 0.6% on the debate and the Dow closed up 0.7%. There was a bit of a stumble early given the drop in the oil price, also already in place thanks to electronic trading. But oil did manage to come back from a fall closer to 3% to this morning be down only 1.5%.

Wall Street also saw data early in the session that showed the Conference Board’s monthly consumer confidence index had risen to 104.1 to represent the highest level of confidence since August 2007, just before the world started to fall apart. This news had a double impact.

Firstly, strong consumer confidence is very good news for an economy 70% reliant on domestic consumption. Secondly, history shows that strong consumer confidence numbers heading into an election typically signal a return of the incumbent party. This makes logical sense.

The morning session was still affected by lingering bank fears nonetheless, until a US Department of Justice official came out to say Deutsche Bank could have its US$14bn mortgage-related fine reduced if it is prepared to cooperate with the authorities. Deutsche Bank shares didn’t exactly rebound on the news but they did steady, allowing Wall Street to focus more specifically on domestic politics.

The US ten-year bond yield nevertheless continued to slide, down 3 basis point to 1.56% last night, in line with ongoing weakness in the German equivalent as this latest bank crisis plays out.

Commodities

The Donald, it appears, is a risk factor. Aside from US bond yields which are playing a different game, last night saw Wall Street up, the US dollar up, the Aussie dollar (perceived as a risk currency) up, and gold, the main sovereign risk indicator, down. In other words, it was ‘risk off” all round last night on Clinton’s perceived victory.

The US dollar index is up 0.2% at 95.47, the Aussie is up 0.4% at US$0.7667, and gold is down US$10.90 at US$1327.00/oz.

West Texas crude is down US69c at US$44.94/bbl.

It was another mixed bag for base metals, with nickel, lead and zinc all up 1% and copper and aluminium down 1%.

Iron ore fell US20c to US$56.20/t.

Today

The SPI Overnight closed down 6 points. We can interpret the mild weakness as a suggestion Wall Street’s debate-related rally last night was already reflected in yesterday’s comeback for the ASX200 from opening lows, and that oil price weakness had already been assumed.

OPEC will meet tonight but nothing is expected.

Janet Yellen will make a bi-annual testimony before the House financial committee tonight, and US durable goods orders numbers will be released.

AGL Energy ((AGL)) and ASX ((ASX)) will hold AGMs today and there are a handful of ex-divs, including Myer ((MYR)).

Rudi has swapped his usual Thursday appearance on Sky Business and thus will make his appearance today, 12.30-2.30pm.
 

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