U.S Presidential Election – The Day Before

Election Climate

With the U.S Presidential Election overnight tonight, the chances of a Trump victory diminished somewhat in the early hours of Monday, following news hitting the wires that the Director of the FBI would not be proceeding with criminal charges, the 2^nd probe appearing to have revealed little to have perhaps even justified the public announcement of the 2^nd probe just over a week ago.

There will be plenty of debate over whether there was gamesmanship involved in James Comey’s actions, which led to a narrowing in the polls, the ABC News / Washington Post having Trump behind by just 1 point early last week. Comey’s survival is already in question as a result, just one day after closing the book on the e-mail saga, the general view being that attempts had been made to influence the election, the argument being that surely there was no other reason for breach of protocol, particularly so close to election day.

Comey will certainly be hoping for a Trump victory, with Clinton and the congressional Democrats unlikely to be as forgiving as Obama appears to be over the entire handling of the case.

How effective was Comey in the end? The latest ABC News / Washington Post poll of polls places Clinton in the lead 47% to 43%, Clinton recovering through the week, her lead having fallen to just 1% following the announcement of the 2^nd probe.

It’s certainly not over for Trump however, Clinton’s margin considered negligible at best, after taking into account margins of error.

While Clinton may have found support from the racial and ethnic minorities, it ultimately boils down to the swing states and the key states.

In 2016, the Swing States are Florida, Ohio and Pennsylvania, while other important states include Wisconsin, New Hampshire, Minnesota, Iowa, Michigan, Nevada, Colorado and North Carolina.

In recent elections, Florida and Ohio have won the election, with 29 and 18 electoral votes respectively, the two states have been swinging between the Republicans and the Democrats.

Over the past 50 years, the 2 states have an almost perfect record of picking the president, the result in Ohio having mirrored the national outcome in every election since 1960, with Florida having diverged on just one occasion over the same period.

So, the single U.S state poll from Ohio on Monday, 7^th November had Trump ahead 46% to 39%, which is a far greater lead than 3 polls from Sunday, which had Trump leading by 1 point in two polls and Clinton leading by one in a 3rd.

As we learned in the run up to the EU referendum however, it’s not the polls that matter and we are about to discover whether the American people have also reached the point of no return, wanting change, no matter what the cost.

Market Impact

Following on from the announcement of the 2^nd FBI probe, market risk appetite, stemming from an increased probability of a Trump victory, remained negative throughout last week, the S&P500 having its longest losing streak since December 1980 although on Monday Wall street indices soared higher as markets bet on Clinton win.

Concerns of criminal proceedings against Clinton leading to the doors of the White House being opened for Trump led to a week-long sell-off and gold rush.

The risk on / risk off debate has become less of a debate and more of a reality as we approach Election Day, market sentiment driven by the candidates’ respective policies and experience in office.

Putting aside Clinton’s experience as Secretary of State and Trump’s lack of political know how, the slide in the Dollar over the last week was perhaps most revealing as the markets ran for cover.

Trump’s desire to hit China with a punitive trade tariff of as much as 45% is perhaps the most lethal policy of all, not just from a U.S economy perspective, but also from a global economic standpoint.

The U.S consumer will have the choice of more expensive Chinese manufactured goods or nothing at all, which may be a stretch, particularly when considering the fact that video game consoles, tablets/laptops, toys and mobile phones make up the lion’s share of imports from China.

If we play devil’s advocate and entertain the possibility that the U.S consumer will play ball and refrain from buying such goods over the next few years, while the U.S catches up on delivering American goods to the American people, let’s consider the impact on the Chinese economy and beyond.

Financial market volatility has been evident on each occasion that the Chinese economy has slowed in recent quarters, the 7% growth mantel having been conceded in the 3^rd quarter of last year. The slowdowns have been negligible when considering the weakness in the U.S economy through the 1^st half of this year, yet the impact on global financial markets and consumer and business confidence has been significant.

Consider pulling the Chinese economy down by as much as 3% instead of the 0.1% declines we have seen in recent quarters.

The good news is that U.S exports to China account for far less than 10% of total U.S exports and as little as 1% of GDP but, if China’s economy is not firing on all cylinders, key trading partners with the U.S will also be struggling, ultimately weighing on the U.S economy.

So do we expect the markets to respond to such policies in a knee jerk fashion or can we expect a more prolonged period of financial market instability?

We do expect a flight for the safe havens should the electoral votes favour Trump, the largest market moves expected to stem from results from key and swing states. Results favouring a Trump victory will drive demand for the safe havens and lead to Dollar weakness, the reverse being the case should results favour Clinton.

A Trump victory will likely need Trump to either end such rhetoric or, in similar fashion to his successes as a businessman, drive the U.S economy into the ground, while having his hand in the honey pot.