America leaning towards Obama, says RWC’s Stuart Frost

Stuart Frost, head of RWC’s Absolute Return Bond and Currency team, says the odds are in favour of Obama continuing his residence in the White House.

• The odds of an Obama victory continue to edge tighter (78%) (according to Betfair)

• At least in the short term an Obama victory should be positive for bonds (no change in Fed policy and potential gridlock over the fiscal cliff)

• USTs shrugged off better economic data last week in the general ‘risk-off’ tone to markets

• However USDJPY appears to have decoupled from the ‘risk-on’/’risk-off’ theme with JPY weakness persisting with BoJ and Japanese Government rhetoric pointing to further intervention

Hurricane Sandy has had a significant negative impact on a highly productive and densely populated area of the US, both in terms of disrupted activity and destruction of wealth via damaged residential and commercial property. In the short term this will depress GDP. Rebuilding should provide an offsetting boost once it gets underway, but is unlikely to be a sustainable engine of growth. What is clear is that it will be even more difficult than usual to decipher the underlying health of the US economy over the next few quarters.

We are a little under 48 hours from the knowing who will be the next President of the United States. This of course has big implications for the fiscal cliff, the debt ceiling, and monetary policy.

This presidential race is one of the closest in history, and the thing to watch is the swing states, especially Ohio. Ohio carries 18 electoral votes and is viewed as a potential election decider as it has picked the presidential winner every time since 1964. Current polls give Obama a slight lead in Ohio, and we should expect projections of who has won Ohio to come in around 21.30 EST (02.30 GMT).

Obama asks for 4 more years for his Presidency, Merkel warns of 5 more years of European crisis

• Safe haven bonds have caught something of a bid, led by Bunds – 2 year yields hover around zero per cent

• Are German yields signalling more stresses to come in Europe? Spanish and Italian yields have only risen marginally so far

• Having enjoyed a strong rally since Draghi’s aggressive summer tactics, risks in BTPs and Bonos look skewed to higher yields

We are concerned with liquidity in peripheral markets with the new regulations on Sovereign CDS exposures – there appears to be abundant liquidity when BTPs and Bonos rally – and we are concerned how these markets will react to pressure with domestics unwilling (or unable) to increase inventory and real money positions now neutral (from short).


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