The news that the FBI has once again found no evidence of criminality in the way that Hillary Clinton dealt with her emails while she was Secretary of State could be a game changer for this Tuesday’s US Presidential election. Support may flood back to Clinton now that emailgate has been put to bed, after her 7 point lead was reduced to a mere 2 point lead at the end of last week.
Markets pricing in a win for Clinton
This has triggered a major jump in the Mexican peso, which had come under intense selling pressure, as Trump seemed to gain on Clinton in the polls. USDMXN fell by 2% at the FX market open on Sunday, safe havens like the yen and Swiss franc tumbled, with USDJPY climbing by 100 pips in the immediate aftermath of the FBI’s announcement. We expect global stock markets, particularly in the US, to erode some of last week’s losses on the back of this news. The S&P 500 touched key 200-day moving average support on Friday at 2,085. We expect it to back away from this level, and potentially move back above 2,100 at the start of this all-important week. We believe that the markets will start pricing in a win for Clinton at the start of this week, which could limit the market reaction if she is indeed declared the victor of this epic race sometime on Tuesday night.
It’s all about the votes, the votes, the Electoral College votes…
Of course, this election does not only hinge on Clinton’s email account. Trump’s campaign managed to recoup impressive gains last week, and his momentum may be hard to shake off. The Clinton camp will also be hoping that the reopening of the FBI investigation, which turned out to be for nothing, put off not too many early voters. Ultimately it all rests on the Electoral College votes, and in this area Hillary Clinton’s lead looks solid, but not as insurmountable as it once did. She is predicted to win 216 votes, vs. 164 for Trump. However, we expect her lead to widen once more, if the latest FBI announcement translates into more Electoral College votes on Monday, as we expect.
A Trump Presidency: the known unknowns
You can’t rule out Trump, and the risk of shy Trump voters disrupting polling expectations in key swing states such as Florida and Ohio remains a known unknown in this election race. For markets this is ultimately the key concern – traders don’t have any special insight into this outcome of this election and this may limit market cheer at the start of this week on the back of Clinton’s email scandal being put to bed (again.) Traders may prefer to sit on the sidelines until the actual result is called.
Not a binary outcome
One thing we can assume, is that if Clinton wins we could see a continued recovery in risky assets like stocks, the Mexican peso, which is done some 8% vs. the USD so far this year, there could be another sell off in gold, and US Treasuries could also take a hammering, pushing up US bond yields, which could also be dollar positive (see more below). A win for Trump is likely to have the opposite effect, but how far the market may decline on the back of a win for Trump is not clear at this stage as this election is not a binary outcome. If Trump wins the Presidential race, but the Senate goes to the Democrats then the more radical elements of his policy, such as building a wall on the boarder with Mexico and imposing protectionist trade policies may get stonewalled by an opposition Congress. Thus, the economic impact of a Trump Presidency is not clear at this stage, and may not be as bad as some fear.
Markets may not fear Hillary, but fear Janet instead
Perhaps the biggest risk from a Clinton Presidency comes not from the politicians, but from the Federal Reserve. If Clinton wins then one can assume that the Federal Reserve would continue much as it did under an Obama Presidency, at least until Janet Yellen’s term is up in 2018. The risk here is two fold: Yellen has warned Congress that she wants the government to do more heavy lifting when it comes to the economy through fiscal policy, as opposed to monetary policy, which could give the Fed room to tighten interest rates further under a Clinton Presidency. This could actually end up being the most frightening outcome for the financial markets, as risk markets have become accustomed to low interest rates. If the Fed starts to hike rates, and refuses to act to stem market volatility in future, then we could see the mother of all market tantrums in the coming years. Thus, if Clinton is triumphant this week then the Fed could stem any Clinton-inspired stock market rally.
It’s fairly pointless looking beyond Tuesday at this stage, as the US Presidential election is King, and everything else, until Wednesday, is playing second fiddle. It will be an interesting couple of days, as this race aint over till its over, and both candidates still have everything to play for.