Elizabeth Belugina, Head of the Analytical Department at FBS

This year advanced economies face serious political challenges: the Brexit vote in June with its surprising and now the US presidential election. As the battle between the Democratic candidate Hillary Clinton and the Republican nominee Donald Trump is very intense, the future of the United States and its markets looks uncertain.

It’s worth mentioning that the public opinion of both challengers is negative. According to Washington Post-ABC News Tracking Poll, 47% of registered voters have a “strongly unfavorable” view of Clinton and Trump alike. As a result, November 8 election will be about trying to choose a lesser evil. In addition, both candidates have their great weaknesses. For Clinton, the biggest problem is a new FBI probe into her email use, while Trump’s ratings suffer from the scandal involving women accusing him of sexual harassment or assault.As a result, neither candidate possesses the key competitive advantage and neither looks significantly more attractive than the other, so at this point either outcome is possible.

In the recent days,investors were rethinking the positions, which had been built on the expectations of Clinton’s victory. Trump’s chances to win the race used to underpriced, and the market tried to correct that: risk aversion increased making stocks and the US dollar decline. Once we get to the election day, the actual outcome will provide fresh drivers for all key markets.

Currencies

As the position of Trump has strengthened in the recent days, the US dollar declined. Hillary Clinton is regarded as the one who will maintain the status quo or, in other words, America’s current policy. If she’s elected, it would mean that everything will go the same way as if there were no elections and Barack Obama administration continued to operate. In this case the Federal Reserve will be able to proceed with a projected rate hike in December. On the other hand, Trump’s election will significantly change the US political landscape and many new risks will appear. There will be new doubts about the US economic performance, and the Fed may decide that it’s too dangerous to tighten monetary policy this year. So, Hillary will be positive for USD/JPY and USD/CHF, while Trump, on the contrary, would help the Japanese yen and the Swiss franc. In addition, the greenback may have good chances versus the British pound, which suffers from the Brexit concerns.

It’s more difficult to say how the election result will affect higher-yielding commodity currencies. Although the US dollar may be initially hurt in case Trump wins, these currencies are extremely vulnerable to the market’s risk aversion: if traders are afraid that there’s some kind of collapse, they won’t seek higher yields and choose safer assets like gold. Moreover, in the longer term it’s necessary to take into account that Trump is expected to introduce fiscal stimulus, which would require higher Fed’s interest rates. Only time will show how soon the market will start to price in higher greenback, if Trump occupies the Oval office. And, of course, emerging-market currencies and especially the Mexican peso will get under negative pressure in the Trump presidency scenario – this has something to do with the fact that Trump proposed to build a wall on the Mexico-US border.

Stocks

The VIX index, which measures expected US stock market volatility, is near the highest levels since Britain voted to leave the European Union. Not only the US stocks were affected by the mounting uncertainty, European shares are hit as well.

The short-term market’s reaction may offer trade opportunities. Trump will certainly bring more volatility both in the short and longer terms. Be aware that Trump is associated with tax cuts, which will likely increase America’s budget deficit, threats to remove Fed chairman Janet Yellen, renegotiation of trade agreements with Canada and Mexico and aggressive trade policy in relation to China. If Trump gets elected, we may see a Brexit-like reaction in the American stocks in the short-term: there was an immediate reaction to the downside, S&P 500 lost more than 5% in the following days. Trump is closer to the US than Britain, the impact may be bigger.At the same time, Trump presidency will mean a lower probability of the Fed’s rate hike in December. So, after the US stock market may find something positive after the initial decline.

Remember that the more the market is afraid of Trump now, the greater the relief rally will be there if Clinton wins.Hillary’s victory will be in line with the overall upward trend in the US stock markets. At the same time, the investigation will likely make her life difficult, so the longer-term prospects of American market may be not very bright.

Commodities

The two candidates have very different view on the energy policy. Hillary Clinton supports alternative energy and intends to cut US oil consumption by a third in 10 years. She aims to cut tax subsidies on oil and natural-gas companies and invest in research for clean energy. In the short-term her policies will be aimed at decreasing oil supply and thus bullish for the prices. Trump, on the other hand, proposed to increase oil exploration thus increasing oil supply. Trump has said he wants to lift restrictions on American energy, expand production of oil and natural gas and “save” the coal industry. As a result, his victory would be short-term bearish for oil process.

As for gold, the precious metal, which is used as a hideout from risk, may gain more than $100 in the short-term on winning Trump and lose about $30 on victorious Clinton.

Conclusion

The overall conclusion is that despite the kerfuffle created by the media, one shouldn’t be too dramatic about what’s happening in the US. We should treat this event as the one with high importance and great volatility. We have to be more prepared than we were during Brexit. We must seize this opportunity to make profits or stay out of the market and calmly watch the show.