Insider versus outsider. Establishment versus rebel. Compassion versus pride. The 2016 US presidential election is one of the most polarised campaigns in living memory. In a campaign where many rules are broken, and statements and policies are up for grabs, predicting the outcome is particularly difficult.
A key in understanding market reactions to the election of either candidate is monitoring market positioning in the lead up to the vote. From an economic point of view, this is a not a choice between good and bad, but between bad and worse. The Democrats “tax and spend” approach is unlikely to reduce balance sheet strains or reduce the structural deficit over the medium to long term. However, the potential for economic vandalism if the populist Republican is elected could spark a very sharp market reaction.
The USD sits at the heart of any market reactions. If Trump is elected, there will be conflicting influences. Trump’s promises (?) to save American manufacturing jobs point to tariffs and trade barriers, potentially supportive of the USD. At the same time, uncertainty around the direction of policy and an overall isolationist approach could see the US Federal Reserve maintain a lower for longer interest rate environment.
Clinton’s more stimulatory policies are less likely to still the Fed’s hand. While concerns about the long term would linger, in the short term a rally in USD is likely as markets are likely to interpret a Clinton success as a continuation of current settings. This should see more weight towards interest rate rises, and a stronger dollar.
The other major factor in the election is that the Trans Pacific Partnership deal with Asia Pacific nations is dead in the water. Both candidates are distanced from the Obama initiative, and approval of both houses of Congress is required. No presidential sponsorship and predictions of a split Congress suggest that no matter who occupies the white house a TPP will not pass for the next four years.
No trade deal and a stronger USD could work well for Asia-Pacific region, particularly for export industries. The lack of a TPP could work for local economies as it also delays any potential trade pact between Europe and the US. With even the North American Free Trade Agreement under threat, highly competitive industries of the eastern hemisphere could win out.
A higher USD could not only see demand swing to Asia-Pac, but will also likely weigh on commodity prices, potentially reducing input costs. Despite the lack of a trade deal, initial responses could include a better trade outlook for lower production cost and high value-add exporters.
Perceptions of trade impacts are therefore important in forecasting possible market reactions. The other major factor is potential investment flows. Whichever candidate wins the race, the growth prospects for the US are subdued. Europe is unlikely to break to higher growth rates anytime soon, which leaves the higher growth rates of Asia Pacific to stand alone.
A Clinton victory could mean a more exports and higher growth rates, which in turn should see support for the Hong Kong 43, the Japan 225, the Taiwan 50 and the Australia 200 indices.
On the other hand, a Trump victory has the potential to roil the US SPX 500. Uncertainty about policy, open hostility to Wall St and an overall populist approach puts the market performance at risk. Positioning is paramount. Any move down from all-time highs in US shares before the vote will reduce post-poll risk. However, if the index remains at highs, and the less favoured candidate is elected, a rout in stocks is on the cards.
Naturally, a significant sell down in US shares will echo around the globe. This could spark the worst case scenario. Investor confidence crumbles with the US 30, and spreads to other growth related markets such as industrial metals and energy. Already lowered prices come under additional pressure, and fear of another deflationary pulse moving through the global economy pushes more investors to sell. A panic develops, feeds on itself, and share markets half in value over a relatively short time.
Central banks have little capacity to deal with a rout. If this damage developed it would require a response from politicians world-wide. If the market disruption from a Trump victory led to politicians finding the will to fix the structural issues so many national balance sheets face it may end as a long term positive for the global economy.
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