Markets brace for US presidential elections
US presidential politics has an interesting effect on stock markets, and the current year is no different. In the aftermath of Super Tuesday on March 1, several interesting developments took place. For starters, two candidates emerged as likely front-runners for their respective parties in Donald Trump for the GOP and Hillary Clinton for the Democrats. By Super Tuesday – a day that sees a large number of states voting for their respective candidates – Donald Trump amassed 316 delegates, followed closely by Ted Cruz on 226 and Marco Rubio on 106. On the other side, Hillary Clinton racked up 1,034 delegates and her opponent Bernie Sanders came in with 408 delegates.
To win the Republican nomination, a total of 1,237 delegates are required and for the Democrats 2,382. Interestingly enough, markets rallied on Super Tuesday, but the performance of equities was largely unrelated to the politicking taking place. Market participants are firmly focused on the fundamental factors that are driving demand for equities, and observing the political sideshow from a distance at this juncture.
However there is increasing evidence that as March 15 approaches and it becomes clearer who the likely GOP nominee will be, there will be a lot more politically-fueled trading activity on Wall Street. The current state of the GOP and Democratic delegate count (March 6) is as follows:
Trump 380 Cruz 297 Rubio 123 Kasich 34
Clinton 1,121 Sanders 481
For most of 2016 to date, the focus with respect to equities has been on China, emerging markets, oil prices, negative inflation rates and the UK referendum on June 23. These issues are seen as fundamental to the performance of equity markets in 2016 and beyond. The biggest drivers of equity weakness in 2015 and 2016 include the following: persistently low oil prices brought on by oversupply and weak demand, a devalued CNY and fundamental weakness in the Chinese economy, currency weakness in emerging markets and widespread capital flight and disinvestment. But one of the biggest drivers of current uncertainty in global markets is negative interest rates in countries like Japan, across the Eurozone, Switzerland, Denmark.
Typically, the impact of negative interest rates on the countries that use them is negative. There is no body of evidence that supports the long-term benefits of imposing negative interest rates. There are initial spikes in performance, followed by flat growth or no growth. The ECB imposed a 30-basis point negative interest-rate at -0.30, the Bank of Japan imposed a -0.10% rate, Sweden has a rate of - 0.25%, and Denmark has -0.75%. Negative interest rates are theoretically intended to dissuade commercial banks from parking their money with central banks, thereby encouraging lending to consumers. However, credit tightening is the order of the day with recessionary fears and a liquidity crunch pervading markets. This is evident in the pullback from equities and the move towards gold as a safe-haven security.
These realities are front and centre in the global markets even without considering the disruptive effect of Donald Trump on US politics. Trump has monopolised media coverage by a long margin, due in part to his celebrity status (The Apprentice et al), and his persona which is larger-thanlife. Every bit of media exposure that Donald Trump receives adds to his celebrity appeal. He courts controversy and basks in it, and he hits back at his detractors without regard for political correctness. It is precisely this disruptive effect that he brings to the political scene that is generating widespread interest among a growing base of disenchanted voters. The New York real estate mogul is in pole position to lead the GOP in the general election against the likely Democratic nominee, Hillary Clinton.
However as that realisation gains traction with market participants, there is increasing anxiety among traders about the complexion of a Trump presidency and its impact on the markets. Investors are getting a little antsy, and opting to short stocks to protect their financial portfolios. There are concerns that trade wars with China and the Middle East may ensue, perhaps that the markets will be subject to far greater volatility if he is elected in November. It is for this reason that the short-term bears are dominating the outlook among those voting with a political consideration in mind.
However, the volatility that Donald Trump brings to markets also provides a perfect opportunity for profit potential. Without volatility, there is very little movement in currency trading, for example. As Trump’s position as GOP frontrunner solidifies, a mix of cautious optimism and retreat will characterise the behaviour of investors on Wall Street. His flip-flopping on major issues has many people concerned, but the disruptive effect of trade relations with countries like China and Russia and various Middle Eastern nations has thrown the cat among the pigeons.
Major fund managers such as Phil Orlando of Federated Investors in New York (which manages assets of $350 bln) are concerned about the Trump phenomenon. And there is general consensus among many fund managers that reduced exposure to equities in 2016 is the way to go. Many of the problems with Donald Trump relate directly to his populist rhetoric and lack of substance. That he is able to seamlessly transition from one side of the spectrum to the other on a whim has many investors concerned. The fact that he makes sweeping promises with no substance to his policies is also deeply worrying and gives investors the impression that he will be bringing no game plan to the White House should he be elected. Trump is clearly running a negative campaign and it is hitting a nerve with 35%-45% of GOP voters, independents and a minority of Democrats.
His populist campaign is emboldened by the fact that he himself is essentially a Democrat who has taken a conservative line on veterans’ affairs, immigration and trade. The jury is still out whether Trump is a true conservative, or merely pandering to angry voters. It is this uncertainty about who he is and what he stands for, and what he intends to do when push comes to shove, that is driving negative sentiment in equities markets. This opinion is shared by strategists at Natixis Global Asset Management (a financial enterprise managing $870 bln in assets). The greatest concerns that investors have about Donald Trump rest with his trade policies with China, Japan and India, as well as his ‘isolationist-style’ approach to foreign affairs.
However, the concerns about the political candidates were not limited to Donald Trump – Bernie Sanders also had Wall Street investors deeply worried. The socialist senator from Vermont has extreme views on American financial corporations, banks and the redistribution of wealth. But since he is unlikely to gain traction with a broad base of Democrats, the impact that he is having on economic affairs is limited.
That Hillary Clinton has surged ahead of him in the polls and promises more of what Barack Obama has been promoting for the past eight years has likely assuaged market concerns. From a Democratic perspective, Hillary effectively represents a preponderance of Obama’s policies economically, politically and socially. She may well go further than Obama in terms of a liberal agenda. Clinton rhetoric, unlike Trump rhetoric, is unlikely to cause much disruption in financial markets since Hillary has been a staple of the establishment for several decades.
There are concerns however that an FBI indictment against Clinton for her handling of government e-mails on personal servers could throw the entire US political system into turmoil and that would be far more devastating than a Trump presidency.