The long awaited US election is just hours away now with voting on Tuesday and results likely early Wednesday morning. It has been a hard fought campaign with stark differences in policy and style between the two parties. Earlier this year, the Brexit vote result kicked off a lot of volatility because traders had been complacent about a Remain win and were caught completely off side. Similarly, US markets had been complacent about a Clinton win for much of this year, but once bitten, twice shy traders have started to recognize the potential for a Trump upset, moving capital out of risk markets toward defensive havens. What are the polls telling us? Donald Trump could seriously score an upset victory this election Source: RealClearPolitics.com Recent polls show the two sides essentially in a dead heat, with Donald Trump regaining momentum over the last two weeks. There have been a lot of questions about accuracy of polling. Conservative parties and positions like the Leave voters have been polling 2-3% below their actual results in recent years due to a growing tendency of people not wanting to tell strangers/pollsters about their politically incorrect views. The way that Trump supporters have been called “deplorables and irredeemable” by the Democrats, this gap may be even larger than usual say 5-6%. Recent polls, then suggest that we could be in a dead heat with Trump potentially leading. At the end of the day, victory may depend on the enthusiasm of supporters and voter turnout. In 2008 and 2012, a higher number of minorities than usual turned out to vote for President Obama. So far it appears that fewer Blacks but more Latin Americans have been coming out to vote for Hillary Clinton. Reports suggest that polls based on 2012 voter turnout have been showing Clinton leading but reports based on longer term average turnout have been showing a dead heat or Trump lead. Either way it looks like a much closer race than what markets had been anticipating until recently and we still could see a surprise. The US elects its Presidents by State not popular vote, but even the Electoral College projections suggest a close vote or a potential Trump win. This recent map from RealClearPolitics.com shows that several key states in the East including Pennsylvania, Virginia, New Hampshire and Maine have tipped from Leaning Clinton to Toss Up, indicating the electorate is still shifting Source: RealClearPolitics.com As a market strategist, I spend a lot of time studying momentum and currently the momentum appears to be swinging increasingly toward an upset Trump win and a friendly Republican dominated Congress. If Clinton wins, it likely won’t the blowout the Democrats had been hoping for. This means that the Republicans are likely to maintain control of the House and probably the Senate as well, limiting her ability to act without even getting into all of the allegations and investigations swirling around her. Comparing this year with recent Presidential election years gives a mixed assessment on the economy and a desire for change. What are the markets telling us? We could see volatility increase and a big move in either direction depending on who wins Stock prices are based on a combination of forward expectations about political and economic trends, monetary policy trends, company earnings, and other factors, tending to be forward looking by about 6-9 months. Stock markets can reflect complacency and fear about election results and also can reflect the mood of the public and how much desire they is for consistency relative to change. Looking at action in the stock market over the last six Presidential elections in the ten months and the three months before the election, the market was up on average in years when the party in power changed hands, and down on average in years where the incumbent party held on to the White House. This year, after a selloff in January, markets had a strong run through July with the Dow and S&P hitting all-time highs last summer. Since August, however, markets have been drifting downward as uncertainty about who the next President may be started to creep in. This year the market is up 4.4% for the first ten months suggesting a desire for stability but down for the last three months reflecting the potential for change. This other two times we had a split result in 1992 and 2000, the party in power changed hands. Based on this, recent trading suggests that markets may be increasingly starting to anticipate a change at the top through a Trump win Source: CMC Markets The table above also shows that we would see a lot of volatility in the market this month as traders react to the result. In two of the three cases where the party changed hands, the Dow went down in November while in two of the three cases where the same party remained in the White House, the Dow went up sharply in November. A Trump victory could spook traders and send the Dow downwards, while a Clinton victory could spark a rally to retake the ground lost lately at least. Note that if the vote is too close to call and we end up in a contested election situation, the uncertainty could send the market down sharply, as shown by the 5.0% drop in November 2000 when Democrat Al Gore challenged the Bush victory in Florida. What the election result could mean for the Fed, monetary policy and the US Dollar The current market expectation, reflected in US Dollar trading through September and early October has been that Hillary Clinton would win the election in November and the Fed would raise interest rates in December. Currently Fed Funds are pricing in a 76% chance of a December rate hike. Source: CMC Markets Next Generation Trading Platform A Trump win, however, could throw world markets into turmoil and force the Fed to rethink its plans, particularly if it leads to changes at the Fed. Donald Trump has already indicated he would replace Janet Yellen at the end of her term raising questions of whether she would stick around to face a hostile administration. Also questionable at this point is the future of Governor Lael Brainard, an influential dove at the Fed with ties to the Obama Administration who has played a significant role in keeping the Fed on hold this year. Should Clinton win, Dr. Brainard’s name has come up in the media as a potential Treasury Secretary. Should Trump win, however, her influence and stature at the Fed could fall dramatically. Considering, that Donald Trump has accused the Fed of keeping interest rates artificially low to help the Democrats, any delay to rate hikes would likely be short lived, perhaps from December to March after the inauguration. A Clinton win could keep the Dollar near current levels with the potential for a bounce while a Trump win could send the Dollar downward for the short term. What impact could the US election results have on US and UK markets? The Brexit decision that shocked overly complacent markets back in June provides a good place to start when looking into what could happen to the US Dollar and US indices in the coming days. Source: CMC Markets Next Generation Trading Platform Traders fully expected Remain to win the Brexit vote in June and were totally shocked and caught completely off side by the decision to Leave. The initial reaction to the news saw both the Pound and UK stocks tumble. The FTSE, however quickly regained its footing and rallied. As we often see in Japan trading where the Yen and the Nikkei often move in opposite directions as a lower currency helps exporters. Also, many of the FTSE component companies are global multinationals who suddenly became a lot cheaper in GBP terms and relative to their peers so they rallied to equalize. Sterling has started to recover lately on the High Court ruling that a parliamentary vote is needed to trigger Article 50 and a hawkish shift at the Bank of England. A USD selloff on a Trump win could spark another upleg while a Clinton win could shore up USD and create a headwind for Cable. Source: CMC Markets Next Generation Trading Platform US stocks rallied through much of this year up out of a February double bottom but have been rolling over since July. A descending triangle in the index and a steady downtrend in the RSI indicate increased distribution in recent months that has accelerated as the election approaches. This suggests that some traders, having been burned so badly by Brexit, are electing to take money off the table ahead of the vote. Should Clinton win, The Dow could rally back toward its summer highs. Should Trump win, we could see a spike downward like the Brexit related one that happened in late June, followed by a partial rebound as the impact of a likely deeper selloff in USD kicks in. So where is the money coming out of stocks going to? Capital coming out of the stock market has increasingly finding its way into traditional defensive havens, another sign that traders are increasingly planning for the possibility of a Trump win and hedging their positions. For most of the year, there was no relationship between gold and the election but since the first debate in late September, gold has increasingly been tracking the fall and rise of Donald Trump in the polls. The move into defensive havens has accelerated lately with capital also moving back into the Japanese Yen. Source: CMC Markets Next Generation Trading Platform In recent weeks, political uncertainty in the US has renewed interest in gold as a defensive haven. A Trump win could ignite another rally in gold, while a Clinton win could send gold back downward in the short term. The potential, however, that the dark cloud of investigations and potential scandal that has been following the Clintons around for decades may continue to do so means that political risk may remain elevated and gold active for years to come. Donald Trump and the Mexican Peso The US Dollar – Mexican Peso combination has been one of the most sensitive markets to swings in US election momentum this year. Donald Trump’s campaign has been very antagonistic toward Mexico between threatening to renegotiate/walk away from NAFTA, to building a physical wall between the two countries to threatening to deport Mexicans living illegally in the US to blocking remittances and more. Traders have taken success for Trump as a big negative for Mexico, so the peso has been rising and falling in opposition to Trump’s momentum Source: CMC Markets Next Generation Trading Platform The chart above rises with the US Dollar, so an increase is a weakening of the Peso. The pair peaked just before the first debate, but since completing a common 50% retracement of its previous uptrend last month, the Peso has been weakening as momentum turns toward Trump. A Trump win could spark another rally and perhaps a breakout over 20.00 for this pair. A Clinton win, on the other hand, could spark a big selloff down toward 18.00 or even the 2016 low back near 17.00. Hillary Clinton and the Biotech Sector Despite her support for Obamacare (a descendent of Hillarycare from the 1990s), Hillary Clinton has been threatening to go after biotech companies over high drug prices. Source: CMC Markets Next Generation Trading Platform The chart above shows that Biotech stocks sold off dramatically starting in the summer of 2015 when Ms. Clinton started making antagonistic noises toward the sector. While the sector has stabilized this year, it has not participated in the broader market rally, a reflection of the storm clouds looming should Clinton win. In the late summer, the sector staged an upswing as Trump gained in the polls but then fell along with his momentum through the debates. Interestingly, biotech stocks have not participated in the Trump resurgence moves of the last two weeks. This suggests that should Clinton win there may be some downside but a lot of the negativity and risk has already been price in. A Trump win could be seen as a significant positive surprise for the group which could spark a significant rally back toward a retest of the summer highs initially. Other Potential Impacts There are a wide range of major policy differences between this year’s two main contestants and the vote could have a significant impact on many parts of the economy. Donald Trump has promised for example to repeal and replace Obamacare while Hillary Clinton has promised to maintain and improve it. A Clinton win would help to support the health care and insurance companies who have benefitted from Obamacare while a Trump win could send them back downward. Much of the media focus has been on the FBI reopening their investigation into Hillary Clinton’s emails, but Trump had turned upward in the polls before the FBI letter. It appears notices of huge increases in Obamacare premiums may have been the initial October surprise that started to tip the scales in the vote; self-inflicted damage to the Democrats. There also is a huge gulf in energy, climate change and environmental policy between the two parties. President Obama has been very active on the climate change file, signing deals, supporting alternative energy through subsidies and direct investment and blocking pipeline construction most notably Keystone XL. A Trump win could change or undo some of these policies and could be seen as a positive for energy producers and pipelines and a potential negative for alternative energy companies. What about the longer term impact? After the initial reaction and repositioning markets may go back to following the historical Presidential cycle. It’s long been generally understood that a new President coming in tends to make their most unpopular moves at the beginning of their term when they have the mandate for change, and then spend the later part of their term trying to get them or their party re-elected. Because of this, stock markets have tended to underperform in years one and two of a new President’s term relative to years three and four. Source: CMC Markets The table above shows that Year 1 and 2 weakness has tended to be even more pronounced for the Republicans than the Democrats. This may be because the Republicans tend to try and help businesses through tax cuts and reduced regulations while the Democrats tend to try and support businesses and the economy through higher government spending. Looking at this year’s two potential situations, Republicans defeat Democrats or Democrats hold power, we could see a significant decline in the markets over the next year should Donald Trump win but then upward acceleration through years 2-4 of his term. On the other hand, should Hillary Clinton win, we could see a significant move upward over the next year followed by 3 years of choppy waters. About CMC Markets CMC Markets is Canada's leading online CFD provider and was the first company in the world to offer online FX trading. With offices in Toronto, CMC Markets has been offering CFDs and FX to Canadian traders since 2005. Since Peter Cruddas founded CMC Markets in 1989, the company now services more than 80,000 clients worldwide, who placed approximately 30 million trades last year. For more information on CMC Markets visit This commentary is based upon technical analysis. Technical analysis does not consider any of the fundamentals of an underlying company, and as such is inherently uncertain and should not be the only factor considered by an investor in making an investment decision. CMC Markets Canada Inc. is a member of the Investment Industry Regulatory Organization of Canada and Member-Canadian Investor Protection Fund / Membre-Fonds canadien de protection des épargnants. CFDs are distributed in Canada by CMC Markets Canada Inc. dealer and agent of CMC Markets UK plc. Trading CFDs and FX involves a high degree of risk and investors should be prepared for the risk of losing their entire investment and losing further amounts. 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