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US Equities and Dollar Advance after Election, What's Ahead?

US Equities and Dollar Advance after Election, What's Ahead?

2016-11-10 03:29:00
John Kicklighter, Chief Currency Strategist

Talking Points:

  • The election generated extreme volatility in the 'after hours', but markets settled by the open
  • While both US equities and the Dollar rallied after polls closed, sustained strength is dubious
  • An RBNZ rate cut led to a surprise Kiwi rally until intervention threats capped a 100 point move

See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.

There are clear parallels between the market's incredible move this past session and the likes of the extreme global implosion in late August 2015. Are we to expect the same aftermath? Looking back at the dramatic slide that was led by an 11 percent tumble from the S&P 500, the move looked to be more motivated by collective sentiment rather than a particular fundamental spark. What's more, the dive on heavy volume would stall and ultimately reverse. Similar reversals were marked with the Brexit (June 23rd) and Treasury Flash Crash (October 15, 2014). Yet, this occassion comes with a concentrated spark close to record highs and amid a crumbling foundation for speculative appetite.

The US Presidential debate presented a volatility inducing outcome with Republican Donald Trump defying the pre-election poll odds by winning the job. Given the low probability of that outcome priced through markets specifically (harkening back to the close polls and skewed payouts related to Brexit), a flush of volatility generated extreme overnight swings. By the US close Wednesday, however, it seemed many markets were back on solid ground. Despite the calm in the aftermath, the results of the election carry considerable unknowns that cannot be readily priced in and the general deterioration of confidence in leverage before the election will pick up where it left off.

Looking across the market, the S&P 500 and Dollar's impressive reversals should be marked for their volatility rather than their ultimate direction. The former is dependent on the status quo that helped balance low growth and returns with fading confidence in excessive monetary policy. That will be permanently disrupted. For the Greenback, inflation will contend with the very volatility we are tracking to plot out probabilities for a December 14th rate hike - which currently holds above 80 percent. Other markets like the Mexican Peso, Emerging Market ETF and Chinese Yuan are slow to rebound. The Yuan may prove a critical threat to global financial stability. And amid it all, the RBNZ would announce a rate cut to a record 1.75 percent just to see the Kiwi Dollar rise - a response that prompted intervention threats. We discuss all of this and the evolving market conditions in today's Trading Video.

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