Publications
Partners
Cape Town - The near-term direction of global financial markets will be dominated by the result of the US Presidential election, notes Overberg Asset Management (OAM).
While opinion polls are fluctuating in step with the latest FBI investigation, it remained clear that Hillary Clinton remains the election favourite as the poll of polls puts her at around 46% versus Trump on 43%, OAM said in its weekly overview.
It added that according to sensitivity analysis, the S&P 500 index would jump by 2% to 3% in the event of a Clinton victory and drop by 11% - 13% in the event of a Trump victory. (see Bottom Line below for more)
South Africa economic review
• The Barclays manufacturing purchasing managers’ index (PMI) fell from 49.5 in September to 45.9 in October well below the key 50-level, which separates expansion from contraction. Among the sub-indices, the business activity index fell from 47.2 to 43.5 and the new sales orders index from 47.4 to 44.5.
The index of expected business conditions six months ahead fell from 63.8 to 50.6. The data signals a weak start to the fourth quarter and little respite in early 2017. The Treasury’s 0.5% GDP forecast for 2016 may prove too optimistic.
• New vehicle sales fell in October by 10.1% year-on-year, the 19th straight monthly decline. For the 10th straight month all vehicle categories recorded a decline in sales. Among commercial vehicle sales, light commercials fell 10.7%, medium commercials by 26.8% and heavy commercials by 9.2%. Passenger vehicles sales fell 9.5% marking the 22nd consecutive monthly decline.
Vehicle exports provided a bright spot, rising 10.8% on the year and more than making up for the 6.7% decline in September. The weak domestic vehicle sales figures bear testimony to the strain in household spending and the lack of business expenditure.
The week ahead
• SA Chamber of Commerce and Industry (SACCI) Business Confidence Index: Due on Wednesday, 9 November. The Business Confidence Index is likely to show some reprieve in October after falling in September to 90.3 its lowest level since July 1985.
• Manufacturing production: Due Thursday, 10 November. Manufacturing production is expected to slip in September by -0.3% month-on-month following the -1.0% decline in August while year-on-year growth is expected to slow from 2.20% to 0.5%, according to consensus forecast.
Manufacturing is unlikely to repeat its second quarter (Q2) performance, when it contributed to a substantial turnaround in GDP growth, in Q3.
Technical analysis
• While the rand has broken below key resistance levels versus the dollar at R14.20 and R13.80 the strengthening trend is not confirmed by momentum indicators, signalling that the currency is overbought.
• The US dollar index is testing a major 30-year resistance line, which if broken will pave the way for further strong gains in the currency.
• Following the Brexit vote the British pound hit its weakest level against the US dollar since 1985. The £1.30/$ level provides key support, which if broken would open up a Fibonacci projected target of £1.20-1.24/$.
• The long-term JPMorgan global bond index bull trend remains intact, with the yield targeting a new low during the fifth and final wave.
• The US 10-year Treasury yield has broken below key resistance levels of 1.6% confirming that the major bull trend in US bonds is likely to continue as the deleveraging phase is still in its early stages.
• The benchmark R186 SA Gilt yield has compressed to its lowest level since “Nenegate” last year falling below key resistance at 9.0%. The yield is now testing the bottom of the current consolidation channel at 8.5%, which if broken will target a yield of 8.0%.
• The MSCI World Equity index has broken downward from a rising trend-line which has been intact since the 2008/09 global financial crisis. Given the magnitude and duration of the 2009-2015 bull market the overall correction is likely to reach a downside target for the MSCI World Equity index of 1 400.
• Since the 1950s the Dow Jones and S&P 500 have displayed 7-year up-cycles and the top of the current US equity cycle is likely to have just occurred. The next major wave down will complete the 16-17 year secular bear market that started in 2000. The secular bottom should occur between mid-2016 and mid-2017.
• The S&P 500 index has broken to new record highs but the rally is not being confirmed by momentum indicators, which suggests the market is overbought and in danger of correction. A further negative signal is that the Dow Jones Transport Index, traditionally a lead indicator for the broader market, is underperforming the broader index.
• Despite this year’s price rally Brent crude’s break below the key $30 support level in February suggests a continuation of the weakening long-term trend to a downside $25 target.
Copper is regarded a reliable lead indicator for industrial commodity prices and barometer of global economic growth. Despite its recent rally the copper price broke below the key $4 500 support level in February suggesting further downside ahead.
• Gold has developed an inverse “head and shoulders” pattern, which indicates further upward momentum and a test of the $1 400 target level.
• The JSE All Share index is testing an important resistance line but if this remains unbroken the index is likely to move back below the 24-month moving average at 50 900 in turn opening a downside target of 45 000. A break above 54 200 on the JSE All Share index would project an upward move to 60 000 marking a new high for the JSE.
The bottom line
• According to sensitivity analysis a Trump victory, due to promises of substantial infrastructure spending and the effect this would have on the State Budget, would cause Treasury yields to spike higher. A Trump victory would boost the gold price and safe haven currencies such as the Swiss franc and Japanese yen.
• At a micro-level some equity sectors will be more affected than others. Pharmaceutical and biotech stocks are likely to underperform in the wake of a Clinton victory due to expected pricing restrictions. Trade-related sectors are likely to underperform if Trump comes to power due to his tendencies towards protectionism.
• The US election outcome will determine the composition of Congress as well as the next President. Although a Clinton Presidential victory is likely the House of Representatives will almost certainly remain Republican. This means a divided government, with the White House and House of Representatives in the hands of opposing parties.
The Democrats may win the Senate by a slender majority but this won’t be enough to alter the heightened partisanship which has characterised US politics during Obama’s Presidency.
• A divided government, with a Democrat President but a Republican Congress will make it difficult for Clinton to push through her policies. As a result, the hoped-for increase in infrastructure spending may fail to materialise. Increased government spending tends to depend on one party controlling the White House, Senate and House of Representatives.
• On the other hand, a Trump victory could be all the more dangerous due to the expected Republican majority in Congress. Backed by a Republican-dominated Congress Trump would be able to push through his polices with greater ease, leading to greater fiscal stimulus, rising Treasury yields and greater trade protectionism.
• Emerging market bonds and currencies would react badly to a Trump victory due to their sensitivity to US risk appetite and US Treasury yields, which would both be negatively affected, and due to the prospect of increased trade protectionism. As the most liquid of all emerging market currencies, the rand would suffer a steep decline initially.
• Following the negative initial reaction, the rand would respond positively to Trump’s policy of substantial infrastructure spending. Infrastructure spending would have positive repercussions for mineral resource prices, benefitting commodity dependent currencies such as the rand, Australian dollar and Brazilian real.
For the full report, including a look at international markets, click here.
* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.
Disclaimer: Information and opinions presented in this report were obtained or derived from public sources that Overberg Asset Management believes are reliable but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this report.
Are you following the US Election? Where in SA will you be watching? Who do you want to win? Send us your thoughts!
For all the latest updates on the US 2016 Election, head over to our special report page.
We will be bringing you live updates throughout the night, straight into results, on 8 November.
Read Fin24's top stories trending on Twitter: Fin24’s top stories
