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Like Brexit, the US election is closer than odds suggest

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Now that the FBI has re-opened the investigation into Hillary Clinton’s emails, the US presidential race seems to be suddenly up for grabs. However, this is not the case according to the bookmakers, who still see Clinton as 11/4 on, with Trump at 9/4 against. One could therefore assume that a Trump victory would be a big surprise. However, while 60% of voters according to an ABC/Washington Post survey say that the revival of the FBI investigation will not affect the way they vote, 30% of voters claim that it makes them less likely to back Clinton.

With recent polls putting the two candidates effectively neck and neck, turnout will be critical and while Clinton’s email nightmare may not persuade many actually to switch allegiance, it could easily keep a significant number of potential supporters at home. On the other hand, the mind boggles at what sort of revelation would be necessary to put off Trump supporters at this late stage. Thus Trump’s odds look too long and Clinton’s too short in a race that increasingly seems closer than the betting markets think.

The US election has a touch of Brexit to it, and it could be that the betting markets have been manipulated by traders; after all, it requires vastly less money to move the betting markets than it does the bond, equity or forex ones. Crispin Odey, who famously made £220 million immediately after the referendum, having shorted certain property shares and gone very long on gold bullion, would have struggled to make as much as that on Betfair even if he had known the result in advance.

Assuming for a moment that the betting and financial markets are in alignment, what would be the effect of a surprise Trump victory on financial markets? The first thing to realise is that, as with the Brexit vote, the first moves would be exaggerated – or even plain wrong. ‘The Donald’ may have ambitions to build a wall with Mexico, and to put in place alarmingly protectionist measures as regards international trade and renege on the national debt – but how much of his agenda will he actually achieve? Very little:  the US stock market sells off on a Trump victory, with other stock markets doing even worse as the rest of the world catches a cold on the back of America’s sneeze. The US dollar strengthens as investors panic like it is 2008 all over again and buy T bonds and little else. Then at some point, rather à la Brexit, people realise the world is not about to end and markets unwind the initial move as composure is regained. Although, bond yields fail to retrace back down to their pre-8 November levels as Trump rails against over-accommodative monetary policy, possibly having already sacked Janet Yellen (but probably not).

If anything, it is a Clinton victory that is more difficult to decipher. Hillary would seek to take America further to the left than any of her predecessors; but again, how much of her agenda would she be able to put onto statute? There is already talk circulating stateside about her being another lame-duck president. While this may be an exaggeration, a Clinton administration would be much stronger on left-leaning rhetoric than actual implementation. Certainly, the mooted prospect of a Clinton administration behaving like a mercifully-avoided Miliband government in the UK is far wide of the mark. 

Thus a Clinton victory sees a relief rally in stock markets (more so abroad than in the US), and weakness in USD and bonds as a global trade war is avoided, and the Fed can start talking about rate normalisation again. This is before the reality of Clinton as President sinks in, particularly as regards the FBI’s investigation, and markets start to contemplate the prospect of a sitting president facing criminal charges. Although superficially this thought may be bad for markets, they usually relish the possibility of an ineffective president, unable to legislate and forced to concede to laissez-faire – hence the amazing stock market performance under Obama.

While the contrast between Clinton and Trump is superficially huge, both are relying on the blue collar vote for support, with promises to deliver greater prosperity – and, crucially, equality – albeit via totally different transmission methods. The gap between the ambitions and likely achievements of both candidates, however, means that it will take longer than usual on this occasion for the markets to cast their vote.   

All views expressed here are the author’s own and are based on information and data available at the time of writing.

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