What the election means for bonds, stocks, currencies and commodities
While the polls have narrowed for Election Day on Tuesday, adding to volatility in the market, the market is still expecting a win by Democratic candidate Hillary Clinton.
And that means a surprise victory by Republican candidate Donald Trump would likely spark a bout of volatility in the markets.
Bond market scenarios
Under a Clinton administration, the economy would continue to experience trend GDP growth while a Trump win would add potential recession risk, according to analysts.
The more certain backdrop under Clinton would give the Federal Reserve the green light to raise rates, according to HSBC, albeit at a moderate pace given still-mixed fundamentals. In other words, they see a moderate steepening of the short-term, front-end of the yield curve. (The market-implied odds that the Fed will hike rates in December rose to 78% after Wednesday’s central bank statement.)
Meanwhile, bond yields would fall under a Trump victory, according to analysts, given the unfavorable impact of trade and tariff proposals that are likely to get initial attention by Trump, along with increased macro uncertainty that could delay action by the Fed.
“Given significant presidential authority in these areas and a reduced need for Congressional support, the fastest way to move on a populist agenda would be on the trade and tariff front,” according to HSBC. “Rhetoric from the President-elect could increase tensions with trading partners even before the inauguration in January.”
Stock market scenarios
When it comes to the stock market, HSBC analysts see a more positive response from a Clinton win. However, they also warned against expecting too much of a relief rally given that fundamentals are mixed and valuations are stretched.
Credit Suisse also sees positive impact across sectors—particularly in the internationally-exposed industrials. Even sectors under pressure—like the financials and healthcare—could see a bounce back, Credit Suisse says. After all, the financials should benefit from a more stable economic backdrop and a Fed rate increase while biotech valuations are reasonable and the broader healthcare space, including hospitals, would benefit from an expansion of Obamacare.
Meanwhile, analysts note a Trump victory would be negative for US equities, particularly considering the multinational exposure of many US-based companies, which could face new hurdles given Trump’s protectionist rhetoric.
“Whilst appearing unlikely on current polls, a Trump win could have a greater impact on equities given it could result in a significant departure from current economic policy if campaign proposals are implemented,” HSBC writes. “We see a sharp spike in uncertainty in this scenario which, history suggests, would increase volatility, weigh on valuations, and see lower capex growth.”