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US Election Preview: Dax and EUR/USD

US Election Preview: Dax and EUR/USD

Who do you think will win the US election? Hillary Clinton Why will he/she win? Now that the campaign is getting down to the nitty-gritty, populist messages seem to have lost their magic. Her focus on details served Hillary Clinton well in the first presidential debate and I think it will continue to do so during the course of the presidential race. US Elections, the DAX and EUR/USD By: Jochen Stanzl,CMC Markets Germany After some satisfying macro data and low volatility during the summer months, traders should brace themselves for a more volatile autumn and winter trading environment. Several developments are going to influence the current December FDAX future, which is the forward contract of the German DAX index, expiring on 16 December. Markets proved this year that they are able to ignore even the most relevant influencing factors. Over spring 2016, they ignored the upcoming UK referendum on whether to stay within the European Union. They have also been ignoring the fact that on 4 December there will be another referendum, this time in Italy. They are only now slowly waking up to the increasing likelihood of a rate hike by the US Federal Reserve on 14 December. At the same time though, the markets have also demonstrated their ability to react from one trading hour to the next. The US elections represent one tail risk that is about to influence Wall Street. US elections and the markets Americans, unlike Germans, primarily build their pension savings not via state pensions but privately. That means the ups and downs on Wall Street are much more relevant because two out of three Americans are involved in the stock markets in some way. In Germany, the share of the total population invested in equities was at only 13% in 2015. Empirical data even suggests that a weaker stock market in the weeks ahead of the US elections tends to be to the detriment of the incumbent president’s political party, while it helps the competing party’s candidate. Surveys show that both Donald Trump and Hillary Clinton have the lowest approval ratings of any campaign candidates that have ever run for president. Clinton is still under pressure from her email affair and the suspicion that she is a crony of big Wall Street banks, while Trump could spark uncertainty and volatility with his sheer waywardness. A controversial campaign could soon prove to be an important influencing factor on market prices. Markets tend to be very precise in their assumption of risks but from time to time they need to correct wrong assessments. Markets overestimated Donald Trump and underestimated Hillary Clinton ahead of the first presidential debate on 26 September. Within the first 15 minutes of the debate, markets called Hillary Clinton as the winner, which sparked a rally on Wall Street and in the Mexican peso, which is known as 'the Trump thermometer' as the Republican candidate has repeatedly pledged to build a wall to prevent Mexican immigrants from illegally entering the United States from Mexico. This clearly shows that markets perceive the business mogul to be a risk factor and possible threat to foreign trade, economic development and company profitability. On the other hand, Hillary Clinton stands for a continuation of the status quo. She is more calculable and certainty always good for the markets, while uncertainty is the precursor for volatility. Future monetary policy Central bankers at the Federal Reserve are known to tend to help incumbent presidents before the elections – a claim reiterated by Republican presidential candidate Donald Trump during the first election debate. He claimed that Fed chair Janet Yellen is politically motivated. Mr Trump even claimed that the Fed is overusing monetary policy tools to create a false feeling of economic prosperity. While I don’t think that’s the case, the Fed certainly needs to take into consideration the risk that acting before the elections could trigger a large correction in the markets, which could massively increase the chances of Trump becoming president. So withholding a rate hike until after the elections could be a prudent strategy. So yes, the Fed is politically motivated but not in the way Trump claims. To put it simply, the Fed just wants to avoid unnecessary risks. Ramifications for the DAX The course the incoming US president will take won't be known for a few months after they take office. In comparison to that, the future monetary policy of the Federal Reserve is much more likely to be known. A growing number of members of the Federal Open Market Committee seem eager to hike rates and it seems that markets are more or less prepared to digest another rate hike. For the DAX, it will be very important if this triggers a new trend in EUR/USD, which has been moving sideways for over a year now. Any meaningful euro weakness resulting from a Fed rate hike could help the DAX make up its lost ground in comparison to Wall Street. We've already seen the positive effect the weaker pound has had on the performance of the FTSE 100. The same, albeit to a lesser extent, could happen to the DAX (and European equity markets) should EUR/USD break out to the downside. In an environment that is characterised by slow growth on a global scale, the question of which president will follow Barack Obama in the White House is of lesser importance than the question of what future monetary policy will look like, as this will have potentially major effects on EUR/USD. So the elections are important, yes, but primarily for US politics. For the markets, they symbolise a hurdle which just needs to be overcome before clearer signals from monetary policy can be seen.

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