Ahead of the third and final US Presidential Debate coming up at 2:00 am, Thursday the 20th in London, Colin Cieszynski weighs up the importance of the final debate, and how the markets are behaving ahead of election D-Day. Within this special report Colin Cieszynski focuses on: • Why the third and final debate is the most crucial • The possibility that financial markets have priced in a Clinton win too soon • How several US states appear to favour Trump on the ground • The potential for a big surprise just before or after the election Trading activity in recent months suggests that markets are strongly pricing in a victory for Hillary Clinton. The Brexit experience back in June, however, shows that the markets are not a perfect predictor of politics and can, in fact, be dead wrong. Because of this, should Donald Trump pull off an upset victory, or even make the result close enough that Republicans maintain control of Congress, we could see an abrupt change in trading activity and uncertainty replace complacency. The upcoming debate could become a key turning point for both candidates potentially generating the last burst of momentum that could carry them to victory, or send then hurtling toward defeat. Because the two for the visions country are so radically different, momentum coming out of the debate could have a significant impact on the markets particularly if Donald Trump does well or if Hillary Clinton can't seal the deal. Presidential Elections and Market Expectations The table below shows monthly returns for the last six US Presidential election years. In half the years, the same party was elected again and in half the cases, power changed hands between the two major parties. Results show that during the first nine months, in years where the incumbent party held power, the market was up 6.9% while in years where power changed hands, the market was down 7.4%. This suggests that attitudes toward with the direction of the country and with the economy can influence stock prices and results at the polls. Discontent and a weak economy can create uncertainty for stocks and can lead to a demand for change. On the other hand, calls for change can create uncertainty that may weigh on stocks. When things are going well, on the other hand stock process and content with the party in power can feed on each other. In the first nine months of 2016, The US market was up 5.3% suggesting that stocks are content with current policy direction (and why not with the easy money Fed?) but appear to be ignoring the calls for change out on the campaign trail. I drive through several US states during the primary campaign and all the campaign signs on private property were for Trump or Sanders. It seems that complacent markets may be missing this discontent with the status quo. Source: CMC Markets Complacency may be starting to erode. Regardless of the outcome, markets have dropped significantly in the weeks ahead of the vote (October monthly returns) in four of six cases with decline carrying through into November in some cases. The declines seen in August and September of this year suggests some traders have started to recognize the risks and the potential for uncertainty. Is the tide starting to turn? Have we passed peak Hillary? What is the Dow telling us? The Dow soared up out of a February double bottom through to July but since then, signs of distribution have emerged. While trading just below all-time highs suggests traders are expecting more of the same, lower highs suggests some traders have started to hedge their bets and take some money off the table. This slide has continued into the start of earnings season even though results to date have been very positive on balance, indicating concern over who may actually win the election may be starting to seep in. Source: CMC Markets Next Generation trading platform Hillary Clinton and the Biotechnology sector Throughout her campaign, Hillary Clinton has been hostile to drug companies, threatening to go after them over product pricing. Expectations of a Clinton win have kept Biotechnology shares depressed relative to the overall market through much of the year as political risks kept the sector form taking part in the broader recovery. A strong performance by the Democrat could drive Biotech shares downward again while a stumble could spark a rebound. Source: CMC Markets Next Generation trading platform Donald Trump and the Mexican Peso The Mexican Peso have become a crucible for speculation on Donald Trump’s election prospects which is no surprise considering that his campaign has been hostile to Mexico threatening to rip up trade agreements, build a wall between the two countries, block remittances and deport illegal Mexican migrants. Following the first debate as Trump lost momentum, the Mexican Peso rebounded against USD as seen by the declines in the chart below. The chart also shows that sentiment toward Trump has stabilized and a bounce appears possible. Should Trump do well, this pair could rally but should he falter, declines could continue. Source: CMC Markets Next Generation trading platform Conclusion: This election campaign has turned out to be a lot closer than many, especially in the markets, would have thought earlier this year. This raises the potential for a big surprise just before or after the election as markets reprice risks and uncertainties. This week’s debate has the potential to shift sentiment significantly toward broad markets and specific sectors.