Who do you think will win the US election?
Why will he/she win?
I believe Hillary Clinton will win the presidential election. However, it will be a vote against Donald Trump, rather than for Clinton. Trump is frightening enough to mobilise non-voters, and this is an important factor where voter turnout rates are consistently below 65%.
Rout or rise? Asia-Pacific markets and the US election
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.
Implications for the US dollar
The US dollar sits at the heart of any market reactions. If Mr Trump is elected, there will be conflicting influences. Mr Trump’s promises to save US manufacturing jobs point to tariffs and trade barriers, potentially supportive of the dollar. 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.
Hillary 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 may 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 (TPP) 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.
What does this mean for Asia-Pacific markets?
No trade deal and a stronger USD could work well for the 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 the Asia-Pacific region, but is also likely to 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.
The outlook for indices
A Clinton victory could mean more exports and higher growth rates, which in turn should give support to 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 towards Wall Street 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.
The worst-case scenario
Naturally, a significant sell down in US shares will echo around the globe. This could spark the worst-case scenario in which investor confidence crumbles with the US 30, and spreads to other growth-related markets such as industrial metals and energy. Already-lowered prices could then come under additional pressure, and fear of another deflationary pulse moving through the global economy could push more investors to sell. This could then lead to a panic developing and feeding on itself, and share markets halving 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 worldwide. 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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