Over the course of the US election 2016, markets have fluctuated between risk-off and risk-on, reacting to which of the candidates is leading in the polls.
When Hillary Clinton is ahead, it appears the direct impact on markets is less apparent than when Donald Trump has held the lead as markets appear to be guided by domestic, global and fundamental news. While not necessarily risk-off, it removes a significant portion of risk-on behaviour. The important take-away is that a win for Mrs. Clinton may well mean less volatility across global markets.
After a period of lagging in the polls, a renewed surge for Mr. Trump reminds us that anything could happen. Investors should remember how the unexpected Brexit vote caused a violent market reaction and a rush to safe havens such as gold and the Japanese yen.
Removed from the politics, we consider the potential impact of both a Mrs. Clinton and a Mr. Trump win.
Run-up to the US Election 2016
Large institutions are likely to have made their moves prior to the election. News will be relatively light in the two days prior to the opening of polling stations and so trading is likely to be quiet, pending a black swan event.
The closeness of the polls will likely dictate moves in the Mexican peso in the days running up to the election, given Trump’s rhetoric towards illegal immigration from Mexico and towards free trade generally. If Clinton and Trump are neck and neck, we expect a weakening of the peso (USDMXN higher), however a Clinton lead may spur a stronger peso in the run up (USDMXN lower).
Complacency towards a Clinton win will likely prompt aggressive moves against ‘Clinton friendly’ markets in the event of a Trump win. Using Brexit as an example, GBPJPY was the most volatile currency pair when it dawned on traders that the UK had indeed voted to leave the EU, making it a classic risk-off trade.
We think that USDMXN could be the equivalent to GBPJPY if Trump wins, sending USDMXN violently higher in the process.
During the Election
Though most voting will take place during US trading hours, results won’t be called by news networks until nearly midnight East Coast time, at the earliest. Until exit poll results are announced, currency markets will continue to trade a basic risk-on risk-off theme, reacting to which candidate is ahead, and Asian stocks will become the real-time barometer for US markets, which will be closed by the time the victor is known.
We can assume that pre-emptive price action will take place while votes are being tallied and expect speculators to push prices in anticipation of which way each state will vote – which is tricky to predict, and may result in major volatility.
If Trump is seen to be taking key swing states, we expect the market reaction to be bearish USDCHF as the Swiss franc has been a magnet for safe-haven flows, whilst high yielders such as the New Zealand dollar and Aussie dollar to be under pressure.
In the event of a Clinton win we expect the actual vote count to cause more volatility than the announcement, depending on how close the runners are.
After the Election
- If Trump wins:
We expect an initial sell-off in US equities and a higher US dollar, Japanese yen, Swiss franc and gold.
Once markets have absorbed the result, a very different landscape is expected to play out. In the first instance, US stocks may rally to new heights caused by three major catalysts: lowering of corporation taxes; repeal of Obamacare; and, deregulation of wholesale markets.
Lower corporate taxes could entice investment from abroad and stimulate growth. The repeal of Obamacare, if considered a tax, could in theory boost consumer spending and lift the stock market, seeing traders push the index higher as they bet on future earnings potential. However, this in turn could prompt a sharp sell-off of the healthcare sector, as Obamacare’s repeal would weigh on the health insurance sector given participating companies would no longer be supported by forced consumer flows.
Secondly, the Peso is expected to sink, and USDMXN will plunge. This is likely to be the most volatile currency cross, to the detriment of Mexico. The Peso has weakened in tandem as Trump has become more popular in the polls and we do not see this negative correlation breaking up if he wins. More likely, it will strengthen the correlation to accelerate the Peso’s losses.
Finally, interest rates are likely to be raised by the Fed. While we expect a December hike regardless of the outcome of the election, a Trump win increases the odds of one or two more hikes in 2017 if we are to see a decline in stock prices, growth and inflation.
- If Clinton wins:
The longer-term impact of a win for Clinton will have a subtler market reaction than a Trump win. A ripple of calm is likely to go through markets and support stocks, and depending on the timing of the announcement we expect to see US stocks gap higher, especially if it is a landslide victory.
Clinton in office could allow more traditional market drivers to dictate trends, and this has been the pattern when she has led in the polls.
We expect stocks to move broadly higher, and PMI Services and manufacturing data to continue to rebound higher, which should support future earnings growth potential. However, while we’d remain bullish on stocks for a Clinton win, we see potential for a Trump stock market to outperform a Clinton stock market.
If, as is widely expected, Clinton keeps Obamacare close to its current form, the healthcare market could initially outperform. Stocks that currently benefit from the forced-flow of consumer money are likely to trade higher.
Foreign exchange markets will arguably be moved more by the Fed’s appetite for rate hikes than whether Clinton is perceived as an inflationary tailwind. As such, the US dollar is likely to take its lead from market expectations of a December hike in the event of a Clinton win. Assuming a December hike occurs, we expect the greenback to correct from highs as traders book profits and doubt the optimism of the Fed’s dot plot and supposed hikes for 2017. This should help support commodities and of course commodity currencies, assuming they are not in an easing bias.
Matt Simpson is a Senior Market Analyst at ThinkMarkets.com