Publication date: 5 November 2016 | Covering: October 2016
Monthly Briefing
- CRITICAL: US presidential election November 8 is three days away; Clinton vs Trump; markets pricing Clinton as base case
- Fed September 20–21: Held 0.25–0.50% with three dissenters wanting immediate hike; December increasingly certain
- Sterling “flash crash” October 7: pound falls 6% in minutes to 31-year lows near $1.18; hard Brexit fears intensify
- Deutsche Bank: DoJ US$14bn fine settlement; shares at 30-year lows in September; systemic risk concerns ease by October
- OPEC Algiers September 28 deal: production cut framework agreed; Vienna formal meeting November 30
- BOJ easing; Jamaica IMF EFF; NHT J$6.5 million ceiling; rates 0, 2, 4 per cent
Three Days to the US Election: Markets Hold Their Breath
As this review goes to publication on 5 November 2016, the United States presidential election is three days away. The contest between Democratic nominee Hillary Clinton and Republican nominee Donald Trump has been the dominant global political story for months and is entering its final hours with a degree of uncertainty that pre-election polling models have struggled to fully capture. National polls have consistently shown Clinton with a lead of 3 to 5 percentage points, though the Electoral College map is more competitive and a handful of rust-belt states — Pennsylvania, Michigan, Wisconsin, Ohio — are being watched as the potential tipping points. Markets have broadly priced a Clinton victory as the base case, with equities recovering from an early October sell-off as polls stabilised in Clinton’s favour. The VIX — the market’s volatility gauge — rose to its highest level since February 2016 through late October as election uncertainty increased. A Trump victory, which most sell-side analysts regard as the risk scenario, would be expected to generate immediate sharp market moves: peso devaluation, Treasury yields falling on safe-haven demand, and equities selling off before any recovery.
Fed Holds with Three Dissenters; December Increasingly Certain
The Federal Reserve held the federal funds rate at 0.25 to 0.50 per cent at its September 20 to 21 meeting, but the vote was notably not unanimous: three members — Esther George, Loretta Mester, and Eric Rosengren — dissented in favour of an immediate 25 basis point increase. The three dissenters represented the highest number of hawkish dissents since 2014 and underscored the tension within the Committee between those who judged conditions already ripe for further tightening and those who preferred to wait for additional confirmation of progress toward the inflation target. The accompanying Summary of Economic Projections reduced the median projection for 2016 from two hikes to one, while maintaining three hikes for 2017. The market interpreted the September hold and the growing dissent as pointing increasingly firmly toward December as the date for the next rate increase. The November 1 to 2 meeting, sandwiched between the US election on 8 November and year-end, was considered too close to a major political event for a rate change.
Sterling Flash Crash and Hard Brexit Fears
One of the most dramatic single market events of 2016 occurred on 7 October, when the British pound fell by approximately 6 per cent in a matter of minutes in thin Asian trading, briefly touching a low of around US$1.1841 — its lowest level since 1985. The so-called “flash crash” was attributed to a combination of algorithmic trading, thin liquidity in Asian hours, and headline sentiment around Prime Minister May’s indication that the government would pursue a “hard Brexit” that prioritised immigration control over single market access. The pound recovered somewhat but remained near its lowest levels since the mid-1980s through October, reflecting the genuine uncertainty about Britain’s future trade arrangements with the EU. For the Caribbean, and Jamaica specifically, which has a significant diaspora in the United Kingdom and important tourism and development relationships with Britain, the depreciation of sterling had real economic implications: the purchasing power of remittances sent in pounds to Jamaica declined, and the cost of UK-origin goods and services rose.
Deutsche Bank and European Financial Stress
Deutsche Bank, Germany’s largest bank, faced a moment of severe stress in September and October after the US Department of Justice announced it was seeking US$14 billion in penalties related to the bank’s pre-crisis mortgage securities practices. Deutsche Bank’s shares fell to 30-year lows, sparking speculation about systemic risk and whether Berlin would need to engineer a rescue. The episode resonated with memories of the 2008 crisis and raised questions about the health of European banks more broadly. By October, the immediate pressure had eased: Deutsche Bank announced a tentative agreement to settle for approximately US$7.2 billion, and shares partially recovered. The episode nonetheless highlighted the unresolved legacy issues in parts of the European banking system and the ongoing fragility of financial sector confidence in the eurozone.
Jamaica Mortgage Market in October
Jamaica’s mortgage market continued its measured recovery through October, relatively insulated from the most acute global volatility by the BOJ’s domestic easing stance and the IMF programme’s supportive macroeconomic framework. The NHT’s J$6.5 million individual ceiling and tiered rates of 0, 2, and 4 per cent continued to anchor affordable housing finance. Commercial lenders were cautiously monitoring external conditions given the approaching US election and the continued uncertainty in global interest rate markets. The October period typically marks a seasonal uptick in mortgage applications ahead of the new-year property market cycle.
Looking Ahead
The US presidential election result in three days will shape global financial market sentiment for weeks to come. The Fed’s November 1 to 2 meeting — which has already passed as this edition publishes — held rates steady as expected. December now represents the near-certain venue for the first rate increase in a year. The OPEC formal meeting in Vienna on 30 November will determine whether the Algiers production cut framework is translated into actual reduction commitments. For Jamaica, the IMF programme review and the fiscal year budget cycle remain the primary domestic policy concerns heading into year-end. The mortgage market is expected to remain stable, with the NHT’s year-end scheme closings providing the principal volume driver.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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