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In early November 2016, the FOMC will be meeting and the U.S. weekly unemployment numbers are coming in just a few days before the U.S. Presidential election. The markets should see a rise in volatility heading into these events, so you should focus on the FX, U.S. equity and fixed income markets in November.
Although the market is pricing in a 92.8% probability that Federal Open Market Committee (FOMC) voting members will leave rates unchanged, there could be some clues on the timing of the next interest rate hike. Some FOMC officials are expecting one interest rate hike before the year ends, so the focus should be on the December 2016 meeting. It’s highly unlikely that the Fed will shake up the markets right before the U.S. Presidential election.
U.S. Presidential Election Will Shake up the Markets
We’ve already seen how comments and news regarding the U.S. Presidential election affects the markets…so there should be increased volatility right after the U.S. Presidential election.
With less than two weeks until the election, the FBI announced that it was looking into Clinton’s emails, sending some ETFs and currencies into panic mode. The news caused the markets to price in a higher probability of Donald Trump becoming the next U.S. President, which is a game changer.
U.S. Democratic Presidential candidate Hillary Clinton has been leading the race, but she recently came under fire for her emails. The FBI found a slew of emails from one of Clinton’s top aides, which caused the USD/MXN to spike and the U.S. equity market fall.
Now, if this email scandal doesn’t go away, the markets will definitely price this in, and therefore, there will be increased volatility.
Trump Presidency is Trouble for Mexico-Related Securities
Exchange-traded funds (ETFs) tracking Mexico have moved inversely to the increasing probability of Trump becoming U.S. President. As Clinton has been leading Donald Trump, the Mexican peso strengthened against the U.S. dollar and ETFs tracking Mexico also rose.
However, Clinton’s email scandal caused the iShares MSCI Mexico Capped Fund (NYSEARCA: ETF) to fall from $51.03 per share at the close on October 27, 2016 to a low of $49.69 on October 28, 2016. Additionally, we saw the currency pair, USD/MXN, spike above 19.00 on October 28, 2016.
If Trump is elected, look for potential short opportunities in Mexico-related ETFs and the Mexican peso.
FOMC 2016 Meetings
There are only two meetings left for the Fed in 2016. The November meeting should be a nonevent because the Fed doesn’t want to impact the markets less than a week before the U.S. Presidential election. The Fed is most likely leaving rates unchanged in November, but that doesn’t mean FOMC officials can’t surprise the markets. You should still follow what the FOMC says after the meeting because there could be some comments indicating when the Fed could raise rates.
Right now, most market participants are looking for a December rate hike. According to the CME Group 30-Day Fed Fund futures prices, market participants are placing a 73% probability on a 25 basis point rate hike and a 4.7% probability on a 50 basis point rate hike in December.
If rates rise, you should focus on the FX markets, particularly the U.S. dollar. As rates rise, the U.S. dollar should rise due to decreased inflationary pressure.
Head of Trading at Stern Options stated, “The markets should see increased volatility heading into the two big events in November 2016. The FOMC bluffed a rate hike for most of 2016, but there’s a high probability of the Fed raising rates once before the end of 2016…We just don’t know when the Fed could raise rates.
I’m currently focused on the FX market and U.S. equity and will consider either long or short positions depending on the outcome of the FOMC meeting and the U.S. Presidential election.”
The Bottom Line
All eyes are on the FOMC and the U.S. Presidential election. There should be a spike in volatility right after the results of the events are released. Consequently, there are trading opportunities in multiple asset classes that you could exploit.
Cover Image via OUP
