Mar­kets brace for US pres­i­den­tial elec­tions

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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.

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