At the time of writing there is no clear winner in the US Presidential election, but markets are in all out panic mode that President Trump could become a reality. Trump has taken the key battleground states of Ohio and Florida. If Trump does win this election then the pollsters may have wrong-footed the markets once again.
Since the results have started to trickle out, volatility has spiked, safe havens have surged and global equities are coming under intense pressure. The gold price is up some $50 and is currently testing $1,315. USDJPY is down some 300 pips, and US stock market futures are currently predicting a 600-point drop in the Dow when it opens on Wednesday. These are sharp moves; the question is have they been made prematurely?
Trump’s win in Florida could be a game changer
The markets had been focused on Florida, which was considered the must-win state for either candidate. Trump has just been declared the winner of Florida, and leads the popular vote by 49% to 47% for Clinton. Michigan, Colorado and Wisconsin are now must-wins for the Clinton camp. She has already won Colorado, but Michigan does not appear to be going her way, which could be her last stand. Thus, at this stage, a win for Trump is riling financial markets that had not expected this outcome a mere 12 hours ago.
Watch the Senate race
There has been a triple whammy of volatility for the markets. Not only are the markets pricing in a Trump Presidency, but also a Republican Congress. The Republicans have kept control of the House of Representatives, and the New York Times predictor model, is suggesting there is a 95% chance that the Republicans could win the Senate. A Republican Congress could deliver some of the more extreme policies that Trump has touted during his campaign, such as import tariffs and a ban on certain immigrant groups. This is a major concern for the markets, as it could completely change not just US politics, but also the global economic norm.
Brexit-style market reaction to results
The election results so far are having a major impact on the interest rate markets. Market expectations for a rate hike from the Federal Reserve have tumbled to 50%; earlier on Tuesday expectations were more than 80%. The Fed is unlikely to hike interest rates if we see a sharp and prolonged decline in the stock markets, on the back of a surprise Trump win.
Other markets to watch closely if Trump is declared the winner:
- The Treasury market: Bonds have been a big winner this election night, as investors flock to the “safety” of US government debt. However, Trump has made some comments about defaulting on US debt, so we could see US risk premiums rise on the back of a Trump victory.
- The Mexican peso has already weakened to a record low vs. the US dollar, ironically making Mexican goods more attractive to US consumers. The peso is down more than 10%, if Trump is declared the winner, then we would expect some further peso weakness, but we do think that the Mex has taken the brunt of market jitters on the prospect of a Trump victory, so further downside could be limited.
- The Swiss franc: this safe haven has soared by 2% overnight. The SNB has said that it will intervene if Trump wins, and franc volatility rises. So, if we see continued gains for the franc, then watch out for physical intervention from the SNB.
- The Japanese yen: the Japanese vice finance minister said that the Japanese government is watching FX markets closely. We would expect it to intervene if Trump wins and USDJPY sees a further decline.
- Watch out for a large decline in global stock markets, we would expect some markets to go limit down if Trump wins and the Republicans take Congress.
Overall, this election result could be another example of a populist backlash to the political status quo, which is the new norm that the financial markets will have to get used to. A winner is yet to be declared, so we can’t rule out a Clinton win at this stage, but her path to victory is looking very shaky. The other risk for financial markets is how the public react to a win from Trump. Any violent protests could trigger even more volatility. At this stage, it is hard to see how the markets will do anything other than ditch risk on the back of a Trump win. This is unprecedented territory for the US; the political establishment might be blown apart tonight, which could have material ramifications for the financial markets for some time.