“Astute politicians know that most problems they face defy solutions” – an expression says, which proves to be a truth in many political examples. Despite that, election campaigns of both candidates in the 2016 US presidential race herald a lot of fundamental changes and social reforms that are highly anticipated by many Americans. Except the Wall Street.
Elephants or donkeys?
In general, financial markets hate uncertainty. The clash of the Republican and Democratic Party this year is especially thrilling for investors, who are concerned about getting Donald at the wheel, a controversial and ambitious business mogul, whose political appearance came as a surprise for many, probably for Trump himself. Hillary Clinton, a veteran of public service, working in the government for 31 years, knows the ins and outs of this business; that’s why her candidacy was more predictable and favoured by the financial markets.
To understand how elections can affect investor sentiment, it is essential to consider the political stance of both candidates and to figure out the matters on which they converge and differ. Trump’s aggressive protectionist position is at great variance with Clinton’s collaboration-oriented approach.
Trump is planning to revise the participation of the US in the bevvy of international agreements such as NAFTA, WTO (World Trade Organization) and the Trans-Pacific Partnership (TPP), as he considers them working evil for the country. The candidate is also concerned about the trade deficit with several countries, particularly with South Korea and China. In 2015, the US negative trade balance with China reached a record $365.7M, with imports averaged at $481.9M and exports at $116.2M, despite that most of the imports were the final product of US firms with production facilities in China, while US exports utilised raw materials to produce those goods. Trump proposes to revise the Chinese Trade deal and impose a 45% tax on certain imported goods from China. The businessman also pledged to bring jobs back to the country, forcing companies to move production facilities from cheap labour regions back to the US. Localisation of manufacturing in the US is fraught with higher production costs and higher prices that will eventually hit consumers’ pockets. So, the idea of propping up the US labour market looks a bit dubious.
Clinton’s economic stance looks less elevated – she is expected to maintain the democratic course initiated by Obama. Clinton also opposed joining the TPP, while her position regarding NAFTA is also vague. Her proposal to raise taxes on firms that move jobs overseas and encourage those relocating in the country was reckoned by analysts as a “win-win situation”. Firms that are planning to dodge taxes by moving their headquarters to countries with fewer taxes will pay the so-called “exit tax”, which was among Clinton proposals. She also pledged to crack down on various loopholes, which are used by companies to avoid paying high taxes.
One way or another, US companies should probably prepare for a tax reboot, as both candidates expect to “milk the cow a bit more” to raise funds for their nation programmes.
Wealthy should pay their fair share
Regarding personal taxation initiatives, both candidates are quite similar and plain in their views, as they continue to shift the burden of social expenditure on high earners. In essence, the top one percent will sponsor social reforms initiated by the government. Both Clinton and Trump tried to avoid mentioning tax raises in their speeches, by saying that “wealthy should pay their fair share”.
The candidates also proposed a bevvy of other fiscal policies to spur economic growth. Reducing the corporate income tax on past earnings, revising personal income taxes, raising the minimum wage and reducing government spending were among them. If Clinton is elected, the companies returning their past earned capital in the US will pay 14%, whereas, in the case of a Trump victory, they will pay 10%.
Central bank rates and the bond markets
For the Federal Reserve, such fiscal stimulus can be a breath of fresh air. Until now, the problem of economic stimulus was completely pinned on the Fed; that is why every decision was carefully considered for its advantages and disadvantages. If the government undertakes part of the responsibility, the Fed will have more room to raise rates, as there will be lower risks to cool down the economy. Concerned about less accommodation, with the economy running at lower rates, central banks of other countries decided to drop the idea of further stimulus. According to sources familiar with the matter, the ECB is going to gradually fold its current asset-purchase programme, with a possible cut down in March 2017. The Bank of Japan switched to targeting short-term bond yields, while Mark Carney’s recent speech at the House of Lords’ committee showed that the Bank of England doesn’t consider further cut rates to prevent further depreciation of the Pound.
The bond markets that are sensitive to rate changes plunged, as the Fed along with other central banks halted their stimulus programmes. The odds of a Fed rate hike in December are near 80% and continuing to increase. High probability of Fed tightening triggered a rout in bonds with the US and German bond yields dropping to a six-month low, while cash holdings rose to unprecedented levels, comparable with September 2001 attacks. Rising demand for currencies sent the US Dollar to the highest level since January 2016.
Hence, the US Presidential Elections have an indirect effect on the bond market. Their effect on the US Dollar is also hard to overrate.
Clinton’s lead over Trump
Market analysts have mixed views on the economic plans of Clinton and Trump. According to a Financial Times survey, about 70% of analysts polled on 28-29 July said that a Clinton win will mean better reforms for the US economy, while Trump’s economic initiatives were supported by 14% of experts. NABE survey (National Association for Business Economics) showed that 55% of polled economists support Clinton, while Trump was positively assessed by 14% of the analysts.
Relationships with Mexico and Russia
Geopolitical and immigration proposals of both candidates also echo on some markets. The Mexican Peso is risking to cave in if Trump wins, as the businessman pledged to toughen the immigration policy with Mexico and to build a wall to prevent the flow of cheap illegal immigration labour that significantly affects the cost of low-quality labour in the US.
Clinton’s foreign policy views also threaten certain countries such as Russia. If she wins the office, it is likely to see the relations between the US and Russia more strained, as the secretary hit out Crimea annexation, Syria bombings and advocated imposing heavier sanctions on Russia. Trump is viewed as a Putin puppet, who probably has business relations with Russia that he doesn’t want to disclose in his tax returns. The Ruble faces the risk of depreciation, if Hillary wins, on fears of a deepening economic isolation of Russia, also backed by European countries.
A trump for Trump
Last Friday, the S&P 500 index fell to the lowest level in six months, as the FBI resumed the probe into Hillary Clinton’s emails, as she used private email to exchange classified information. The first investigation that ended in June, showed that Clinton was extremely careless in handling confidential data. Trump used this fact to attack Clinton during their debates, however, the case gained traction eleven days before the elections, hurting Clinton’s reputation once again. In the case of more severe violations, then Clinton is risking to be nailed with charges. The reaction of the S&P 500 shows that US financial markets favour Clinton.
Whoever wins the battle for the White House, we wish America finds a prudent and astute leader, who will help the US economy to prosper and advance to greater heights. We also hope that the US presidential elections will bring many exciting trading opportunities and wish our clients every success in their trading endeavours.
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