Markets on new alert for US election fallout
TWO weeks ago, Irish bookmaker Paddy Power felt so confident that Hillary Clinton would win the US presidential election that it started paying punters who had bet on her victory.
Big mistake. This week, Donald Trump’s chance of success, according to the Iowa Electronic Markets, has jumped from 10% to about 40% following revelations that the FBI is reopening its probe into Clinton’s e-mails.
So Paddy Power has done an about-face and reopened its books. Right now, 2/1 odds are being offered on the Republican, and “91% of bets on the US election [this week] have been on Trump”, the betting group says.
A similar about-turn is under way in the financial world.
Until this week, many asset managers were discounting a Trump victory. Even now, groups such as Goldman Sachs continue to stress that this risk is low: the bank puts Trump’s chance of winning at about half that of Clinton’s.
But that low risk is still too high for some investors. “A Trump presidency . . . could spark a sustained period of risk aversion,” says Mihir Kapadia, CEO of Sun Global Investments, a London asset group.
Investors are scrambling to readjust. Barclays, for example, estimates the S&P 500 index could rise or fall 1.5% for every 10-percentage-point swing in the polls. If the chance of Trump winning hits 50-50, they expect the S&P to fall 4% to 5%; a Trump victory could spark a fall of 11% to 13%.
That is unnerving. The markets are also affected by the fact that the events of recent days mean that the outlook for Washington after Tuesday is no longer binary. On the contrary, the risks that investors have to price in involve several highly complex moving parts.
Think about it. Back in June, the EU referendum gave UK voters two options: In or Out. Subsequently, it became clear that the Out choice threw up a range of scenarios, complicated further by the need for a UK parliamentary vote before Article 50 is triggered. Even so, the vote was a “crossroads” — and could be modelled for investors as such.
But in the US election, the potential scenarios look more like a “fan chart of probabilities”. Yes, the presidential choice seems binary: Clinton or Trump. But, given the vagaries of the electoral-college system, the outcome need not match the popular vote.
Meanwhile, the rise of a thirdparty candidate in Utah, Evan McMullin, creates the (smallish) risk that neither Trump nor Clinton will win a simple majority of electoral colleges.
In addition, the outcome of the races in the Senate and House of Representatives could alter the implications of the presidential vote. If Clinton gains control of both, for example, her policies might be dragged leftwards to appease figures such as Senator Elizabeth Warren.
Conversely, if control of the house and senate is split, that could deliver more gridlock — unless Clinton is able to forge a new bipartisan spirit.
There is yet another issue complicating these risk models: legal threats. If Trump wins, he faces a court case over his “university”. This, in itself,
Until this week, asset managers discounted a Trump victory
is bizarre. But the danger hanging over Clinton is even more peculiar — and alarming.
It looks likely that the reopened FBI probe will last weeks, if not months. At best, that could distract and disrupt the next administration. At worst, it could unleash a fullblown constitutional crisis, akin to the Nixon scandals of 40 years ago.
“The decline is not just because the stock market is nervous about Trump,” says Capital Economics. “It also reflects the reality that even if Clinton now wins, her authority and mandate will be damaged.”
The risks thrown up by Brexit look almost simple compared with those of the US election. That is particularly true in a world where most investors are ill-placed to price scenarios that come in multiple shades of grey — and where no one can create an algorithm to model the antics of the FBI.
Brace yourself for further market turbulence.