Dec 22, 2016

Global Markets Overview Post US Election

In this video blog, FX Expert Udi Sela and CMO Jim Jockle provide a macroeconomic outlook and global market overview post US elections. They touch on global currency trends -- strengths, weaknesses, providing an FX market forecast, market analysis and trading strategy update. Lastly, they discuss the US political administration influence and the effect on emerging market economies and currencies.

VIDEO TRANSCRIPT:

Jim Jockle (Host): Hi, welcome to Numerix video blog, I'm your host Jim Jockle. Joining me today, FX expert Udi Sela. Udi how are you, sir?

Udi Sela (Guest): Very well, good morning Jim.

Jockle: So I want to continue our conversation on post-election markets. Last week we had a live conversation on the effects of Trump and Basel but today I want to kind of jump in a little bit more specific into FX and the European view. So Udi, you know, obviously you’re based in Paris, what’s the general vibe right now, now that we’re kind of about three weeks’ post-election.

Sela: Well let’s start with the markets because obviously there are political impacts as well as we just saw the elections in France for the primaries for the right party. But anyways, in terms of the market, we have seen repricing of financial assets. The impact has been across the board. We can touch upon a few things. One thing is that many emerging markets really got slapped; local currencies like Mexico, the Philippines. In general, the dollar appreciated against all currencies, between 5-10%. The latter was really for the emerging part and then there was a massive move of the yield curves. Basically yields going higher. You can say this is a part of the Keynesian expansion, that you know, you’re elected president is contemplating and then of course there was the price volatility that we noticed within the equities space. Kind of surprised everyone if we start first hours you know, the equity markets going down since then we’re probably up about 10%. So in a nutshell, that’s it.

Jockle: We’ve also saw a rally in bonds as well, but that seems to have tempered a little bit at this point. Would you say the markets right now are just going to kind of ease back through the end of the year and just kind of poise until some of these new administration decisions have been made to get a better view of what the economic policy is going to be going forward?

Sela: Well I’d say there is one thing that is still standing and pending and this is the Fed decision next week. Now the consensus, is that it will hike rates and basically the future contracts are the fed funds futures are predicting a 100% probability that this would happen. It is fair to say that we have this unemployment data coming this week. Only if the Non-Farm payrolls will be shockingly low. The market is anticipating something along the lines of 170,000 new jobs created. If the number would be shocking like 20,000 or something of that nature then maybe the fed would halt, but otherwise it’s almost a certain fact that the rates will go higher. So that’s the only event risk if you like.

Jockle: So in terms of strategies, you know we always get in on what you should be thinking in terms from a trading perspective, you know, what are you thinking right now? Is there a particular strategy? Particular derivative type that might best position the near term volatility?

Sela: So I guess the two things to look for, especially what is the predicted inflation because the inflation expectations went higher. So one thing is we saw that in the UK, right, is the weakening of the sterling (and as a result, higher expected inflation rates) and now we see that also in the US and that’s pretty much what the central bank’s want. So you may be looking at buying an out-of-the-money call option on inflation rates. Anticipating that inflation will be above 2%, which is really what the central banks wants, especially I would say in the US and UK. Since there was quite a massive move in the 10-year rate note in the US, now it’s hovering between 2.3% to 2.4%. So in a sense the jury is out where the next move in the 10 years note, is. I mean will there be a correction. Once, Mr. Trump selects his team and policies are put into motion or will it just continue. So, I personally think that the yields will go higher if you like, but since it’s a market and it’s a two-way street maybe buying some straddles struck at the current levels of the ten-year note. I think this is where I would be looking.

Jockle: And in terms of concerns and on your watch list, a lot of talk about obviously moving toward a more nationalistic perspective within the US, renegotiating trade deals from an FX perspective what’s on your watch list right now?

Sela: Yeah, that’s a good question Jim, thank you. One of the things we’ve seen and noticed was the Euro weakening against the dollar to a very crucial support level of 1.05, which it currently is holding. So this is definitely something that I’m watching because if this breaks that we’re going to parity and of course parity has lots of psychological impact, etc. and then I’m also looking at the impact against the Mexican Peso. Which after the elections same day it broke the 20 Peso to dollar level and now it’s trading at an all-time low at around 20.70, so again, this could weaken further. So we see a lot of pain and grief in emerging markets and this can carry on especially if indeed the fed will hike rates and will be now into a cycle of tightening.

Jockle: Are there any surprise potential winners out there in emerging markets?

Sela: Actually, one of the surprise winners is in the G7 markets and it’s the sterling stopped weakening as of the election day. In terms of local markets so I would say that the Russian Ruble. And that of course you can put into geopolitical reasons for that because of course, you know, the new administration would be more favorable to Russia, etc. So it hasn’t strengthened but it hasn’t weakened.

Jockle: Well, Udi I want to thank you so much for your perspectives on the FX-post election. Obviously, one of the other areas that we’re going to think about is the new year. Obviously, there’s always kind of a little bit of a pause, a reset, resetting the tone. You know, obviously as we’re leaving this year, the markets are feeling bullish but is there anything in that new year, January 1 reset, that you have your eye on in terms of a potential trend set.

Sela: Honestly what I think I will be really watching is again the 10-year note in the U.S. It is very, very volatile, and I think this really will drive everything else because everyone is looking at the interest rate gap and the second thing to watch is the dollar against the Japanese Yen because since the elections the Yen has weakened a lot. But at the same time the Japanese Yen is foreseen as a safe harbor, if you like. So it’s really interesting to see the two powers against each other; let’s see which one will be stronger. So I think that’s really be interesting.

Jockle: I think one question there is, is this change or potential change of where the volatility around the 10-year going to influence some of the negative rate policies like Japan has put in place?

Sela: Well, let’s look at it this way. Let’s talk about Japan I mean, in a sense, and also in the European union for that matter. So the weakening of most currencies is actually working in the favor of the centrals banks over there because its making, you know, the exports more favorable, more receivables, and its making inflation rise. And indeed, we’ve seen surprisingly good data coming out of Japan. Simultaneously, the growth in Germany has stalled. So they would definitely have an interest in having, the euro weaken further, especially the German economy being so sensitive to exports.

Jockle: Well Udi, I want to thank you so much and definitely in the new year I want to sit down and chat with you again because I think we’ll have even more clarity as to what this new administration looks like. We’ll have clearly some market movements and volatility to talk about in terms of trend-setting into 2017. So, Udi thank you so much for joining us and of course we always want to talk about the topics that you want to talk about please follow us on Twitter @nxanalytics or on LinkedIn or on numerix.com. I’m Jim Jockle, thanks for joining.

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