Market jitters abound ahead of Fed, Election

2 November, 2016

Key financial markets, most notably with respect to equities and the US dollar, have felt increasing pressure and heightened volatility in recent days as several primary risk events draw ever closer. On the very immediate horizon, the US Federal Reserve announces its monetary policy decision on Wednesday at the conclusion of its November FOMC meeting. Moving forward, Friday brings the heavily anticipated US jobs report, which promises to be a significant factor in December’s Fed rate decision. And, of course, next Tuesday features the US presidential election, which has become even more interesting as new developments have surfaced and the race becomes tighter.

Wednesday’s Fed decision is widely expected to contain more of the same Fed-speak as interest rates will likely be left unchanged once again. With the Fed Fund futures market only pricing-in around a 7% probability of any rate hike tomorrow, markets are expecting that the very close proximity of the US election next week will yet again preclude the Fed from acting. However, the FOMC statement will still be closely watched for any signs that Fed members are leaning increasingly towards hiking rates in December, as the last meeting showed an unusually divided vote tally among members. In the run-up to Wednesday’s statement, rhetoric from Fed officials has been mixed, but several have indicated the need for an impending rate hike. A more hawkish statement on Wednesday could likely lead to a renewed surge for the US dollar, which has fallen sharply on Tuesday due to several factors, including upcoming election risk.

The US jobs report on Friday, which features the closely-followed non-farm payrolls report, will play a key role in the Fed’s December rate decision, as employment data is one of the major decision factors for the Fed, along with inflation. Current forecasts are for an increase of around 175,000 jobs in the month of October, an expected improvement over the previous month’s disappointing 156,000 reading. The US dollar will likely be moved considerably if there is some significant deviation from expectations, as is usually the case.

Finally, next Tuesday’s US presidential election will very likely be one of the most substantial market-movers this year, especially since the race has appeared to become tighter after Hillary Clinton’s email troubles resurfaced late last week. The FBI’s new investigation of Clinton’s private email server usage when she was US Secretary of State has the potential to derail her previously comfortable lead in the final stretch of the presidential campaign. Last Friday, this revelation prompted a brief but sharp dive for stocks and the US dollar, and a corresponding surge for safe-haven gold. Markets are averse to uncertainty, and the prospect of an unpredictable Trump Administration scares investors when compared to the perceived-stability of a Clinton presidency. Furthermore, some have warned that a Trump presidency could result in a recession and plunge for the stock market, at least in the initial phase. As the potential email scandal weighed on Clinton’s prospects while boosting Trump’s, Tuesday saw a further drop for stocks and the dollar, and a sharp up-move for gold. As it currently stands, national polls have indeed showed Trump gaining somewhat on Clinton’s lead, although most polls of polls and electoral college projections are still leaning considerably towards Clinton. Any further developments in the FBI probe, however, could change this situation rapidly, which could make next Tuesday a very tight contest.

With market volatility currently high and rising, the Fed, US jobs report, and presidential election will be the primary market movers in the coming days. Directional moves for the stock market, the US dollar, and gold, among others, will largely be determined by the outcomes of these critical events.


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