How US election outcome will impact various asset classes

As US elections head for the home stretch with both the leading candidates heading for a photo finish, financial markets across asset classes are jittery. Higher volatility is visible across all markets, be it oil, gold, bonds, currency or equities.

Bets are being placed on the outcome of markets depending on who will win the elections. Hedging strategies are put in place by investors and corporates to protect themselves of sudden movement in the financial markets.

A prelude to how markets are expected to behave was given by world market on reports of Donald Trump closing the gap on Hillary Clinton in the presidential race. While most investors expected Hillary Clinton to win the elections, recent disclosures by Federal Bureau of Investigation (FBI) on Clinton’s e-mail controversy has helped Trump regain lost ground. Since the FBI disclosure, riskier assets fell while safe havens attracted buyers. However, within a week FBI managed to scan through 650,000 mails and clear Clinton’s name, giving market a chance to rally.

We shall take a look at how various asset classes are expected to behave if Hillary Clinton or Donald Trump moves to the White House.

Equity: Stocks can fall as much as five per cent on a Trump victory says a report by Citi Research. Barclays Plc also feels that in case of a Trump victory there could be a ‘violent flight of quality’. A Hillary win would result in moderate gains for the market as the narrow win would result in tweaking of taxes and some infrastructure spending. Street currently expects a Clinton victory and a Republican House (divided government as is the case presently). Any deviation from expectations becomes an undesired outcome. No sweeping changes are expected by analysts in such a scenario.

Based on his election speeches, Trump is expected to rock the boat. Market fears that he may announce key policy changes that will disrupt long standing trade relation with China and Mexico and the revocation of North American Free Trade Agreement (NAFTA). The fall could be severe if he calls for changes in the financial markets by repealing the Dodd-Frank legislation.

A Democratic ‘sweep’ could result in a five per cent fall says Citi Research. Banks and pharmaceutical companies are expected to bear the brunt as stricter laws are brought in to control them.

But the biggest issue is in case of a hung verdict where no one reaches the 270 seats mark or Clinton wins and Trump refuses to concede (citing a “rigged” outcome) could lead to more market weakness as uncertainty drags on, says the Citi report. In the 2000 presidential election, the S&P 500 dipped more than 11 per cent from Election Day into December when the Supreme Court intervened to clear George Bush over Al Gore as US President.

Oil: US election is likely to have only a short term impact on oil markets feel analysts. Societe Generale pointed out that global prices would not see any sharp swings no matter who clinches the victory, given the oil markets is still grappling with a surplus. However, both candidates favour cleaner energy which would mean better days for renewables and lower demand for oil. Some market experts are of the view that Trump presidency could see an increase in U.S. oil supplies as he favours the U.S. being more energy independent.

Bond: Increased volatility in bond markets has resulted in profit booking as investors prefer to wait on the sidelines ahead of the results. According to a Reuters report  quoting Lipper data, investors pulled out $2.495 billion from investment-grade funds and a whopping $4.116 billion from high-yield funds – the third-largest outflow for that asset class since records began.US and German 10-year yields are close to their highest level since the Brexit vote in June.

A Wall Street Report says that no matter who wins, bond market will feel the pain. A Trump victory would likely initially spur risk aversion as hard-wired responses in financial markets would kick in and Treasurys would probably rally. But investors might not want to rush in. Political uncertainty and concerns over protectionism and fiscal policy could mean investors demand a higher risk premium for U.S. bonds, says the report.

On the other hand a Clinton victory would be more likely to push investors back into risky assets such as stocks, also hurting bonds. The focus could move swiftly back to the Federal Reserve’s efforts to raise rates.

Gold: Gold markets thrive on uncertainty, it usually does before US elections. But this time around market experts feel uncertainty will continue and help gold prices if Trump wins. A Trump win is likely to bring in uncertainty till he comes clean on his policies. Irrespective of who wins studies  show that as the dust settles, the year following the elections is bad for gold prices.

Currency: The most closely watched markets internationally is likely to be currencies as election results will start pouring in. A flight of capital to safer haven like Swiss franc of Japanese Yen is expected if Trump emerges as the winner. Mexican Peso and Chinese Yuan will be other currencies which can see pressure on Trump’s victory given his stance on import restrictions.

A Clinton victory is likely to push the US dollar higher as continuity of policy can be expected and market attention will then shift to the Fed increasing interest rates.

-Shishir Asthana.

This article was published in Business Standard. Click here

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