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Volatility Increases as US Election Echos Brexit Angst

Volatility Increases as US Election Echos Brexit Angst

2016-11-08 05:18:00
John Kicklighter, Chief Currency Strategist
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Talking Points:

  • The US Presidential Election is dead ahead, and its sway over global risk and trade is complete
  • There is a corollary to the June Brexit where one outcome is status quo and the other unknown
  • A strong rebound in risk-oriented markets and measures should be taken as a sign of volatility

Join our special election day coverage and see what other live events are scheduled this week on the DailyFX Webinar Calendar.

We are in the final stretch of the US election cycle and the market's focus is clear. We opened up the new trading week to news that Democratic candidate Hillary Clinton was cleared in the FBI's second probe into leaked emails. A rally from global equities, high risk assets and Yen crosses lead some to suspect a preferred outcome from the markets. However, that assumption and speculation over the outcome should be reserved by cautious market participants. What is certain in the last days and weeks of market waves is that this event is capable of remarkable breadth and extraordinary volatility.

In this week's opening move, the S&P 500 posted its biggest rally in 8 months while the Dollar clawed back some of the preceding weeks' steady losses. Yet, the implied (expected) volatility in the markets remains explicitly high. There is a recent event for which Global Macro traders can draw upon for guidance on how to treat this divisive event: the UK's Brexit. Though complications are likely and expected, this is a binary event like the United Kingdom's referendum to leave or remain in the European Union. In that case, to remain would be 'status quo' and to leave was seen as the uncharted path. We can only speculate on the alternative outcome (remain) but we saw the shock through the Pound of the vote to leave.

From the market's perspective, Clinton is seen as the 'status quo' outcome and Republican candidate Donald Trump is the dramatic change - both for better or worse. It will be near impossible to motivate markets that feel the international reach of the US economy and financial system until the event passes. After the count is in, however, the transition back to dominant and persistent market themes will likely happen faster than many participants would suspect. There will certainly be alterations to the bearings on risk trends, Fed forecasts, global monetary policy and the traction on global protectionism with the outcome. Yet, return these themes will. And, when they do, the markets will be more capable of gaining traction. We look at the market's heading into, during and after the election in today's Trading Video.

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