Market Sentiment Hangs on US Election, Trend Will Arise from Elsewhere
- The S&P 500 - benchmark for sentiment - has posted its most consistent drop since 1980
- As remarkable as the statistics and tech patterns are, sentiment trends have not been decided
- Tuesday's election is an inescapable risk; but sentiment, Fed outlook, Brexit and themes matter
The markets have developed quite the range of extreme statistics through this past week. The S&P 500 suffered a nine consecutive day decline, it's longest since 1980. Meanwhile, volatility heading into this election cycle is the highest build up of pressure since the VIX has been around (1990). Much of this anxiety is centered on the upcoming US Election Tuesday. The uncertainty the event generates is extreme given the months of negative press and the protectionist threats that have been hurled. That said, the actual impact is likely to be less extreme then some of the headline imply. While the focus should be kept on this known event, the view of trend should be reserved for the underlying themes we have been watching for months.
Among the key drives in the market, the most prominent is risk trends. This would seem an obvious vehicle for the US election, but there may be more influence afforded to this event than what is practical. While there will be anger, doubt and fear regardless of who prevails; the existential threat that it poses will deflate as reality sinks in and impact is seen as a longer-term process. That said, the tide of market sentiment is not set to the election alone. We've seen pessimism rise behind complacency well before this news headline crowded traders analysis. We will certainly return to a more systemic risk assessment after it passes - with the outcome incorporated of course.
Other themes that have only be temporarily sidetracked include Fed rate forecasts and the Brexit bearings. Both the Fed's rhetoric this past week as well as the strong showing in wages in the labor data set a high probability course for a rate hike on December 14th. That will be a significant driver for the Dollar. The UK's High Court ruling on Parliament's say in the Brexit procedure has also changed the projection on one of the most active themes in the FX market. The Cable's (GBP/USD) best week in years may signal a new trend change if this fundamental theme builds traction. We discuss the focus for global traders going forward in this weekend Trading Video.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.