Are Markets Becoming Complacent Again?

As the US heads to the polls on Tuesday, traders around the world are strapping in and preparing for what could be 48 hours of substantial volatility, particularly in event of a Donald Trump victory, an outcome the markets appear confident is now unlikely.

The problem is the market has been complacent in the not too distant past, having left itself very exposed to Brexit which resulted in some very aggressive moves in the early hours of June 24. I don’t think we’re quite seeing the same level of confidence in the markets ahead of this election but still, it does appear we’re quite vulnerable now to a Trump victory which is not as ludicrous as the betting odds – currently pricing in 80% chance of Clinton victory – would suggest.

Source – fivethirtyeight.com election forecast

Yesterday’s rebound in US equity markets was quite punchy so close to the election. Granted we were just seeing the losses from the previous nine session losing run reversed on the news that Hillary Clinton had been cleared again by the FBI but still, a full reversal in one session is some going and it would seem to suggest that there will be no lingering damage from the reopening of the investigation in the first place, something I’m not convinced about given the mistrust people already have towards Clinton.

As you can see on the chart below, the polls suggest we’re in for a much tighter race than the odds would suggest.

Source – Real Clear Politics Poll Average

We’re currently seeing a little more caution in the markets this morning, something that may continue throughout the session given that markets are very likely to become quite volatile overnight tonight. European equity markets are expected to open a little higher, tracking some of the latter gains from the US session on Monday. Gold meanwhile is trading up slightly around $1,282 which suggests there is still a partial Trump hedge in place despite other markets suggesting otherwise.

Everything else today, such as economic data and the few earnings reports that are scheduled to be released will more than likely be overlooked today, given that all of the attention will be on the election. Still, from the UK we will get manufacturing and industrial production figures for September as well as the NIESR GDP estimate for the three months to the end of October, while in the US we’ll get JOLTS job openings for September.

Another U-Turn

For a look at all of today’s economic events, check out our economic calendar.

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