Wealth Bulletin: All eyes on the US election, China’s Renminbi and Philippines President Rodrigo Duterte

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Wealth Bulletin: All eyes on the US election, China’s Renminbi and Philippines President Rodrigo Duterte

This week's expert, Rohit Bhuta, Chief Executive Officer of Crossinvest (CEO), summarises how the previous 7 days' moves will be affecting your investments.

Published on 31 October 2016

In an investment world that appears to be dominated by volatility, it feels strange to note that the main headlines last week are very much the same as prior ones – the US election, the sterling  post BREX-wish-we-could-reverse-IT, China’s Renminbi (CNY) and associated currencies, and Philippines President Rodrigo Duterte.

With regard to the US election, Clinton extended her lead and appeared to be a clear favourite to lead the US for the next term, until of course the email scandal reared its ugly binary head again. The FBI director announcement over the weekend was ill-timed at best, and at worst, possibly intentional if viewed with a conspiratorial hat on.

The British pound  has been another focus area over the weeks. The comments last week by a leading UK government lawyer suggesting that the courts might likely determine that BREX-wish-we-could-reverse-IT would require a parliamentary review before invoking article 50, had excited the “stayers” – their hopes were subsequently dashed when the courts decided a parliamentary review was not required. The sterling struggled last week and threatened to continue sliding into unchartered lows.

The CNY weakness has been a general concern despite solid macro releases in September – it further weakened against the USD to 6-year lows, while USD gained against most currencies to an eight-month high.

In the emerging markets, Thailand is in mourning and trying to come to terms with the King Bhumibol Adulyadej’s death. Concerns over Duterte’s pivot to China away from the US and doubts over Brazil’s fiscal consolidation, wrapped up last week’s material events.

In Asia

There are certain significant PRC-related concerns – those centred around the stability of the PRC’s GDP, the underlying CNY, as well related capital account flows.

There have been renewed concerns of late over a potential property “bubble”. We think this may be somewhat exaggerated but we will stay vigilant and be on the lookout for signs. A greater concern in our view is the likelihood of a bond “bubble” and the related potential sell-off in high yield bonds issued by the PRC property developers.  

Despite the robust India growth story since Indian Prime Minister Narendra Modi came into power, the recent macro data released in India raise potential concerns around the impact on underlying growth. There are further concerns on the INR ahead of the $24bn redemption in Q4 of NRI deposits, entered after the INR crisis in late 2013.

So far, the early days of  the Thai King’s passing have been relatively calm. The succession could go awry however, and we are keeping a close watch on events there.

Duterte’s increasingly damaging policy statements, which appeared to be mostly improvised, are raising concerns for foreign investors in the Philippines’ equities and bonds markets. It is also creating unease for the leading business groups and we are monitoring the situation closely too.

In US

Clinton’s circa 5% lead in national polls places her in a good position to win enough (of the 272 Electoral College) votes required. The attention is increasingly on a likely Democrat regaining of the Senate and on the possibility of an improbable victory in the House of Representatives’ elections.

Having said that and not forgetting the unexpected Brexit outcome , it would be dangerous to call the election based on polls, especially after the FBI announcement over the weekend.  Although the odds are under 20% of  a Trump win, and even if it is unlikely from a common sense perspective, he may just win – and this eventuality is likely to have significant repercussions for global risk assets and could lead to a crash like a “bond” shock. A Clinton win has already been factored in by the markets and is unlikely to “rock the boat”.   

If the uncertainty of this Hollywood drama is not enough, we will be faced with the prospect of a Fed hike (or not) in December, and the underlying volatility that we might see from that. This week will see the release of the October macro data – ISMs & then NFP –  a poorer-than-expected data could impact the Fed decision while a stronger-than-forecast data would focus fixed income markets on risks of FED hiking two to three times next year versus the current fixed income markets’ expectation of just one in December this year, and then nothing else until  2018.

Interesting times indeed.

The Week Ahead

The global markets have reached interesting technical levels in several currencies (USD, EURO, CNY, SGD, GBP), in 10-year US treasuries and in several equity markets. Risk assets are precariously positioned – any positive or negative “shock” can, given these technical positions, see significant moves in these risk assets either way. The markets’ are closely watching the US election – the recent turn of events concerning a certain FBI director, who may suddenly have had an (patriotic or a conspiratorial) epiphany, may provide the catalyst for one such (negative) shock this coming week.

Brace yourselves as the next ten days unfold in the vein of a true Hollywood drama. A democratic “sweep” of the US Presidency, Senate and the House of Representatives, a position which is previously deemed to be highly unlikely, can provide a significant catalyst – this will likely lead to overall negative sentiment towards the SPX and certain sectors like pharmaceuticals, large banks and fossil fuel energy, among others – which may have a potential to affect other markets, notably the emerging markets.

We are, unfortunately, unwilling participants in this drama – how we (and the investment world) will be affected is a direct correlation to how this drama unfolds. Stay tuned.

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