FX market views Trump as a huge negative

Outlook:

We should be watching yields fall. The Bund yield is the lowest since July and Finland went below zero today for the first time. In the US, the 10-year at 1.576% is horribly close to the previous lowest low at 1.5176 (Sept 7). Why are yields falling when "lower for longer" is being questioned, most obviously in the US but elsewhere as well? We had a low of 1.3784% last July. At the time, El-Erian explained it by saying US paper still looks pretty good when some 30% of global sovereign issues are negative-yielding. The failure of bond holders to demand a premium and their willingness to accept a discount on US notes means they see little or no risk of inflation or mean-ingful rate hikes at the short end.

In sum, the bond market still does not believe the Fed is on a sustainable hiking trajectory. It may even be "one and done."

We get Case-Shiller and consumer confidence today, but the talk will be all about oil and about the de-bate.

With all due respect to Goldman, which just cut its forecast from $50 to $43, nobody knows what com- plicated back-room deals might get done with the key players, Saudi Arabia and Iran, having centuries of deal-making (and treachery) under their belts. Perhaps they hate the West more than they hate one another, or perhaps both need the money to avert their own versions of the Arab Spring. This is not economics or finance—it's history. Reuters reports "Saudi Arabia and Iran on Tuesday dashed hopes that OPEC oil producers could clinch an output-limiting deal in Algeria this week as sources within the exporter group said the differences between the kingdom and Tehran remained too wide."

But just watch--it ain't over. It will be with us, probably, for decades. We lack information on condi-tions in Iran, but we know the Saudis are starting to feel the pinch. Last night the kingdom cut public sector bonuses and benefits. The FT reports "The royal decree also ordered ministerial salaries to be reduced by 20 per cent and pay for members of the appointed consultative council be cut by 15 per cent."

We have to be careful not to attribute every move in every market to the debate—month-end and quar-ter-end are nigh and calendar effects count. All the same, no amount of spin can make Trump look good. Bloomberg reports Clinton went into the debate with a 69% probability of winning the election and came out with a 73% chance, Trumps' chances declining proportionately. See the chart.

Clinton allowed Trump to speak more, and he did indeed hoist himself on his own petard. A CNN snap poll shows 62% of debate-watching voters said Clinton won the debate compared to 27% for Trump. Public Policy Polling got 51%/42%. Various fact-checkers found a lot of Trump lies, including Trump's denial that he accused the Chinese of inventing global warming to make US manufacturing uncompetitive. The Guardian pictures the tweet (https://www.theguardian.com/us-news/2016/sep/26/debate-fact-check-trump-clinton-live-quotes-hofstra). Especially offensive was the Trump charge that Yellen and the Fed are politically motivated, and once the Fed hikes, the current bubble will burst and everyone will be vastly poorer.

It's clear the FX market views Trump as a huge negative. The FT story about various rates tracking every word is unprecedented. A Commerzbank FX analyst said "Just over an hour after the end of the debate our G10 factor model showed that the FX market was dominated by risk-on, ie increased risk appetite." Emerging markets currencies like the Korean won, South African rand and Indonesian rupiah all gained—rising yield trumps falling risk.

"Just as striking, though, was the surge of the Canadian dollar against the yen, which rose from Y75.85 to Y76.385 as the debaters hit their respective strides and Tokyo dealers opted to play in a currency pairing with more liquidity than the yen/peso. The Canadian was buying ¥76.52 at the start of European trade. ‘It was really surprising how closely the [Canadian dollar/yen] pair was tracking the debate,' said Nomura FX strategist Yunosuke Ikeda. He noted that the market was taking Mr Trump's temper as a drag on his chances of being elected: ‘Every time Trump looked too emotional, the Canadian dollar went up against the yen. When Trump shouted, the yen fell.'"

The FT reports that "The apparently stronger performance of Mrs Clinton, said analysts, allowed mar-kets to postpone their fears of a Trump victory and the expected international market turmoil that might follow. " Now we have to watch the polls. FiveThirtyEight says we must be patient and wait 5-7 days for new polls to reduce noise and give us a more accurate picture, not that polls are ever very accurate (because the people who claim to be likely voters often do not, in fact, vote).

In the meanwhile, traders who don't want to see a dollar crash can take comfort in the CNN poll results of debate-watchers showing 62% thought Clinton won over 27% for Trump, a 35-point margin. That's the third-widest margin ever in a CNN or Gallup post-debate poll, which date back to 1984. The only more lopsided outcomes were the 1992 town hall debate between Bill Clinton, George H.W. Bush and Ross Perot — widely seen as a maestro performance by Clinton — and the first debate between Barack Obama and Mitt Romney in 2012, when the CNN poll showed a 42-point win for Romney and the horse-race polls moved in his favor in the following days." But despite a lousy Obama performance in 2012, he still won. So watch out.