U.S Presidential Election 2016 Outlook – Presidential Race Tightens

Election Climate

The U.S Presidential Election is just a week away and, despite an increased possibility of a Donald Trump victory in the race to the White House, the markets have seemingly gone about its business relatively calm considering the possible impact on the financial markets, should the results go against the polls.

The latest polls continue to reflect a Clinton lead, but it has certainly narrowed, the BBC’s poll of polls giving Clinton a 49% to 46% lead over Trump. Perhaps of more significance is the narrowing in the ABC News / Washington Post tracking poll, which has seen Clinton’s lead narrow from 12 points to just 1 over the last week, the poll capturing responses following Friday’s news of a 2^nd FBI probe.

The run up to the election has certainly not been without incident with the most significant events having been video footage of Trump’s past catching up with him in what he referred to as locker room talk, which resulted in a number of women coming forward speaking of being sexually assaulted by the Republican candidate.

Reaction to the video footage was particularly damming, not only for Trump, but also to the entire Republican Party, division in the ranks were all too clear as many revoked support for the Republican candidate.

A media offensive followed, with the chances of a Trump victory looking to be on the ropes until Friday’s news release that the FBI had kicked off a new probe into Clinton’s use of a private server while Secretary of State, which comes after the first probe in July that resulted no charges being brought against the presidential candidate.

Despite the Republican’s opportunity to seize on the latest Democratic offering, Clinton has managed to hold on to her lead, according to the polls, though as we have learned not too long ago, polls are not an indication of the likely outcome, but merely a weak guide, with the undecided unaccounted for.

Market Impact

There has been many debates on how the financial markets will respond to next week’s presidential election and, while many uncertainties remain over how various asset classes will ultimately respond following the immediate reaction, recent moves suggest that the markets continue to side with Clinton for the White House.

With Presidential candidate Clinton the market’s apparent choice, the result of the election will likely be a ‘risk on’ / ‘risk off’ scenario in the days that follow the result.

A bigger question will be whether there is a clean sweep in the elections, giving the Democrats the White House and control of both Houses. Such a result would likely have a similar impact on the financial markets as a Trump victory.

As things stand, a Republican victory would be considered a ‘risk off’ result by the markets in the days following the election result.

Amidst heightened volatility, we would expect to see increased appetite for the safe havens, driving demand for gold and the Yen, at the expense of commodity currencies and global equities, with emerging economies dependent upon trade with the U.S. also at risk.

Trump’s foreign policy is expected to weigh on the Dollar against the majors, countries with sizeable U.S Dollar reserves, such as China, likely to sell-off Dollar assets in the wake of a Trump victory and with that, there is also the current outlook of a December rate hike by the FED to consider.

Perhaps the currency most at risk will be the Mexican Peso. The Peso has been the barometer on market sentiment towards a Trump victory next Tuesday, Friday’s night’s spike having little to do with macroeconomics and more to do with Trump’s foreign policy, his intentions being to impose punitive trade tariffs on China and Mexico.

Over the summer, the FED was clear in the fact that political outcomes were of no consideration for monetary policy decisions, but as we have seen in the not too distant past, financial market volatility has led to the FED having to reverse its intentions to lift rates and with the elections just one month before the FOMC’s December decision, further Dollar weakness will likely prevail in the event of a Trump victory, particularly when considering the gains made by the Dollar in October alone, as market expectations of a rate hike ease.

Friday’s move to the safe havens can be considered a blueprint of what to expect, but with a more significant spike not too dissimilar to the moves seen across the asset classes as the outcome of the EU referendum began to become apparent in June.

Clinton has continued to be considered the safer bet for the markets having experience as the Secretary of State and having been First Lady, but with a 2^nd FBI probe underway, there is no knowing the outcome, the probe expected to extend beyond next Tuesday’s Election result, which does raise a possibility that criminal charges could be brought against a newly inaugurated U.S President, though for now the assumption is that such an outcome would be unlikely.