Growing speculation that the recent easy money cycle may be ending while political uncertainty is on the rise continues to send shockwaves through global stock and currency markets.
US indices are consolidating yesterday's losses with US index futures down slightly today. Last evening Chicago Fed President Evans, a non-voter this year but voter next year, indicated he thinks if inflation picks up we could see a rate hike this year, and left the door open to November. This is particularly notable as Evans is one of the most dovish Fed members. He also indicated that while indifferent on the timing of the next hike, he expects the longer term rate hike path to be gradual.
Today’s ADP payrolls may also spark a round of Fed speculation trading in USD and stocks. The street is expecting 165K down from 177K last month, I’m thinking 220K with the summer holidays over and jobless claims low. If I’m too high it would suggest the US election may be impacting business decisions including hiring.
Meanwhile in Europe, speculation the ECB is considering ending its asset purchase program through tapering back purchases like the Fed did in 2014 won't go away despite denials from the ECB. European indices are trading lower on the news with the FTSE down 0.5% while the DAX, CAC and IBEX are all down 0.6%.
EUR is the top performing major today rallying against USD, GBP and JPY. Market action indicates that traders are now thinking even if QE continues for a while longer, its limits have been reached and additional stimulus out of the ECB is unlikely. JPY, on the other hand continues to retreat with the Bank of Japan still in pedal to the metal stimulus mode.
Crude oil is rallying again overnight with WTI and Brent both up 1.8%. Another big surprise drop of 7.5 mmbbls in API oil inventories sparked the latest rally with more action possible around today's DOE mid-morning report. Gold stabilized near $1,275 overnight following yesterday's collapse. CAD has not followed the oil rally opening room for a CAD catch-up or a crude correction. Resource stocks may also be active again today with prices providing a tailwind to energy producers and a headwind to miners.
Political uncertainly may also be influencing trading in some markets. In the UK, GBP continues to slide following comments from Bank of England MPC member Broadbent indicating concern over the impact Brexit may have on business investment (although he may also have been trying to justify the MPC hitting the panic button prematurely).
Meanwhile the US election also presents the potential for swings in the markets. Last night's Vice-Presidential debate was apparently seen as won by Republican Mike Pence, stopping a recent shift in momentum toward the Democrats. Even with the supposed Clinton debate win and apparent Trump implosion over the last week, the race remains very close, especially after factoring in that conservatives around the world tend to do better at the ballot box than in pre-election polls. The next Presidential debate is Sunday night and a close contest could rattle complacent markets in the coming weeks.