November 8th might just be a seminal moment for the world, not just markets ..... but we'll stick to markets (mostly).

Monday 7th November 2016

November 8th might just be a seminal moment for the world, not just markets ..... but we'll stick to markets (mostly).

ref:- "The Trump Dump", The Sunday Times 6/11/16, Business

ref:- "Trump win need not be as bad as markets fear", Roger Bootle in The Daily Telegraph, Business

The FBI inform us (strangely, way ahead of schedule and contrary to earlier intimations) that nothing new or worthy of prosecution is contained in the latest batch of 650,000 emails that seemed capable of turning the presidential election on its head. Does that mean it's all hunky-dory for Hillary? There's a good deal of relief evident in markets this morning (not least a big rally in the Mexican Peso), but if anyone thinks this thing is even close to being done and dusted, then they're missing some key points:

Mrs Clinton's lead may be back out to about 5% according to the latest ABD / Washington Post poll, but in many of the key swing states her lead is more like 2 or 3%  --  in other words, inconclusive.

Mrs Clinton's biggest danger may be a low turnout , which is a big possibility. Anecdotal evidence suggests that Mr Trump's supporters on the whole are more committed than much of the soft Clinton vote who support her because she is "the least worst" candidate.

The recent history of polls globally suggest that they are NOT to be relied upon.

The world may have gone mad ..... we are talking about a candidate who has repeatedly threatened not to accept the result if he loses, despite there being no evidence of the election-rigging he alleges. One could argue that Mr Trump's position represents a genuine threat to democracy, but it's one that does seem to cause too much angst either in his own mind or in those of his supporters. 

Careful now, we can't get involved too much in the politics or personalities so we'd better concentrate as promised on markets. A Clinton victory is very much the preferred outcome for markets and she is above all the "continuation" candidate. Which is to say, don't expect anything too dramatic apart from some reversal of Trump Victory hedge trades (see below) and some trouble for specific areas of the stock market  --  pharmaceutical companies that Hillary sees as profiteers and a financial sector that she deems is in need of more regulation spring to mind.

And a Trump win? We make no apologies for repeating ourselves but it's hard to be precise about market moves because the Donald's pre-election promises have been so vague and at times contradictory. It's confusing, all right .... Trump is appealing most of all to blue-collar, white workers in the rust belt and beyond but as far as we can tell wants to slash taxes on corporations and high-income individuals. Ah, but he also wants to cut taxes on low-income individuals and at the same time increase spending on defence and infrastructure .... and in doing so he'll REDUCE the budget deficit. Intuitively to modern thinking, the sums do not add up but IN THEORY could do so if you believe in the massively stimulative effect of lower taxes  --  it's called the Laffer Curve, apparently. President Reagan was the last to try it and ended up with huge budget and external deficits.

Also part of the Trump package is his intent to pull out of trade agreements and impose tariffs on imports from Mexico and other emerging markets. Doing so in the interests of American jobs may sound alright on the stump (even Mrs Clinton has adopted a more protectionist stance), but if people are forced buy imported goods at higher prices or inherently more expensive domestic alternatives, it's unclear just how that will benefit low-income families.

Then there's Mr Trump's antipathy towards the monetary policies of the Federal Reserve, and his frankly shabby and unsubstantiated attacks on Chair Janet Yellen. This smacks of interference in central bank decision-making and for financial markets would be about the biggest "NoNo" of the lot if it wasn't for his implied suggestions that the US government should renege on its debt.

In truth, what's come out of Mr Trump's mouth has been scarcely believable at times and if you took it all at face value you might be forgiven for thinking that we're only a few percentage points away from a giant and possibly lemming-like leap into the unknown. Except, argues Mr Bootle, it wouldn't be like that. Talking policy off the top of your head on the campaign trail is one thing, putting things into practice once elected is quite another. Advisors and officials would likely force a much more coherent and reasoned plan on Mr Trump, and the nature of the Congressional system and the Supreme Court in the US is specifically designed to put the brakes on any President deemed to be over-reaching his powers.

Still, there's no doubt that a Trump victory would be decidedly market-unfriendly, and to forecast what the market reactions might be you only have to look at the action every time Mr Trump's poll ratings have risen. It sounds simplistic, but for a Clinton win you can in large part assume the opposite. It must be stressed at this point that we're talking short-term reactions here  --  we need to remember Brexit, and how knee-jerk reactions do not necessarily presage more considered market moves. In fact, Bloomberg point out that after Presidential elections the immediate action is more often wrong than right as a predictor of where markets will be in a year's time.

Anyway, just to repeat likely SHORT-TERM market moves in response to a President Donald Trump:

Stocks sharply lower, some say up to 10% on the S&P 500. Defence, banking and pharmaceutical stocks likely to perform better.

Dollar sharply lower, except against Mexican Peso. Jap Yen and Swissie particularly in demand through safe-haven buying.

Gold higher

US Treasuries higher in a flight-to-quality. Of course, things will change very quickly if budget plans are deemed reckless or there is any hint of Mr Trump making good his threat to renege on government debt.

It's odds against, but the world may be a very different place in 48hrs time ....... see you on the other side.