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One possibility is that the financial markets will trade calmly on Wednesday. However, what is more likely to be the case is that following the U.S. election the financial markets will enter a state of upheaval. Leaving alone speculations of a possible repeat of 2000, the reality is that many financial markets are girding for a post election bout of volatility. Below are some speculations.
Gold could quickly correct to $410 an ounce
Net commercial short interest as a percentage of open interest (futures & options) remained above 40% last week (as of Oct 26) for the fourth week in a row. This unprecedented streak suggests, at minimum, that a pullback in the price of gold is due. Also to note, the net-long fund position reached another record high last week of 167,239 contracts, and nonreportable net long interest declined to 8.45% of open interest. What these conflicting statistics tell us is that more weak hands continue to go long, but the weakest hands (historically) are not being sucked into the rally.
A completed election and/or any bounce in the U.S. dollar will send gold crashing lower. The commercials are aggressively positioned to profit from any decline in the price of gold, and – at least during the current bull – the commercials have always ‘guessed’ right.
U.S. Dollar could bounce
Whether or not the U.S. dollar is destined to adjust lower against major currencies is irrelevant (at least for the moment). Rather, assuming Bush or Kerry is voted in without conflict, the U.S. dollar should receive a short term bounce. The U.S. dollar has been shorted in near record numbers by election speculators, and some short covering has already begun (yesterday).
To expand upon ‘at least for the moment’ – expect the dollar’s moment to end next week or, possibly, by Friday (payrolls). The post-election period of calm may give shorts reason to cover but ‘going long the dollar’ is not likely to become a popular slogan for institutions unless the U.S. economy can show signs of strength. Yesterday’s ISM number suggests a continuation of the weakening trend in manufacturing.
Stock Markets: Would A Bush Bounce Really be Bigger?
After trading as low as 9660 only six sessions ago the Dow has managed to climb back above 10,000. Given his desire to rollback tax cuts and allow Canadian drugs to roam freely in the U.S., the consensus is correct in that Kerry is more negative for the markets and specific stock sectors than Bush. However, there is the potential for terrorism fears to linger with a Bush win.
Leaving the terrorism speculations alone, expect a steady U.S. stock market that quickly begins to take cues from the economic data and/or interest rates. Unlike the dollar and gold – which have only in recent hours began to adjust to a rosy post-election world – stocks have rallied leading into the election.
What if following the vote no winner is proclaimed and each side launches a legal battle to try and get into the oval office? The 2000 experience tells us that such an outcome would be bad news for the markets. Common sense tells us that such an outcome would be vastly, and yet strangely entertaining.
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