Would Trump cancel the Santa rally?

With Donald Trump bouncing back in the polls, what could the repercussions be for financial markets should he take office?

US flag
Source: Bloomberg

What a difference a week makes. We have seen Hillary Clinton move into a perfectly timed, seemingly unassailable lead, only to come unstuck by her Achilles heel; the emails. Friday’s announcement that the FBI are set to investigate another hoard of emails which have conveniently appeared from another investigation has thrown the contest into doubt once more. With an ABC poll pointing towards a one point lead for Trump, coming just a week after it gave Clinton by 12 points, are markets finally waking up to the reality that Trump could actually win? Given what has gone before, what would be the market response in the event of a Trump presidency?

Indices

The common perception is a Trump presidency would be bad for stocks and the economy, albeit over the short-term at least. This may be the case, after all ‘markets hate uncertainty’. However, perhaps there is a lesson to be learnt from the UK Brexit experience. Perhaps the group that loathe uncertainty even more than markets are the ladies and gentlemen that make up the Federal Reserve.

The widely-held view is we will see the Fed raise rates in December, coming one year after the last rate hike. That decision was certainly not a popular one for stocks, with the Dow Jones and S&P 500 both falling approximately 13% in the month following. Perhaps a Donald Trump appointment would delay that perceived pain.

As such, there is a strong chance we could see a market rally irrespective of who is voted in, with the ‘stability’ that Clinton offers boosting market morale, while a Trump win drives a rally upon the realisation we will see rates lower for longer. The timing of a rally in the case of a Trump win would be down to when/whether we see Fed members convey a shift in their outlook after the result.

Mark Carney took the steps to ease market fears after a sharp deterioration and we could see something similar if Trump enters office.

Dow Jones price chart

FX

This week has provided a perfect example of what is likely to be the initial response to the dollar should Trump succeed next week. With recent weeks of increasing confidence of a Clinton victory, the FBI announcement on Friday was a game changer, sparking the sharpest day of downside for the dollar in almost two-months.

Today’s ABC poll is likely to be responsible for a similarly extensive sell-off in the greenback. While the Mexican peso is expected to be one of the biggest losers in the event of a Trump victory, it is likely that the yen will be one of the biggest winners, as uncertainty and fear takes hold.  

Dollar Index price chart

Commodities

The precious metals appear to be enjoying Trump’s reemergence today, with both extending their recent recovery. Typically seen as a haven from uncertainty, it is worth noting gold gained over 9% 12 days from the EU referendum. Given the clear desire to flock towards both gold and silver since Friday’s FBI announcement, it seems realistic a Trump win would bring about a strong move into these assets.

Gold price chart

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