Markets & US Presidential Elections: Looking Back and Moving Forward
by Christala Parmaxi
Markets & US Elections
It is official: the US has elected the Republican Party nominee Donald J. Trump to be the 45th President of the United States! Donald Trump defeated the Democratic candidate Hillary Clinton and will assume his full responsibilities as the President on January 20th , 2017. Throughout his live, Mr Trump has worn multiple hats: he’s a businessman, a billionaire, a real-estate developer and a reality TV star, however, he has never held a public office in his 70 years of life. Donald Trump has proven that he can manage a big fortune and develop an extraordinary wealth through business and his personal charisma. In 2016, Bloomberg estimated Mr Trump’s net worth at USD 3 billion while the Forbes ranked him as the 156th wealthiest person in the US and the 324th wealthiest person in the world. In micro-economic, the new US President rocks, but can he do the same with the government’s fortune and be a great “macro-economic businessman” – this is the question asked all over the world.
According to CNN, Donald Trump was leading Hillary Clinton from the beginning of the votes count and managed to earn 290 Electoral College votes against Hillary’s 228. However, Hillary Clinton won the popular vote by 47.7% against Trump’s 47.5%. Due to Trump’s provocative campaign, markets were overreacting on every single poll before the election, during votes counting and of course after Mr Trump had won 270 Electoral College votes, leading him to become the new President-elect.
Trump’s controversial statements throughout the campaign prompted the uncertainty in the markets and economies of countries who have solid ties with the US. These are just a few examples of Mr Trumps statements that caused volatility in the currency markets:
- “I’ll bring back our jobs from China, from Mexico, from Japan, from so many places. I’ll bring back our jobs, and I’ll bring back our money.”
- “I will direct my secretary of the Treasury to label China a currency manipulator.”
- “Bilateral talks with Mexico would start pretty quickly on the wall.”
- “When that Ford car comes back across the border into our country that now comes in free, we’re gonna charge them a 35 percent tax.”
- “We’re going to get Apple to start building their damn computers and things in this country instead of in other countries.”
- “We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals. We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it.”
- “I am proposing an across-the-board income tax reduction, especially for middle-income Americans.”
- “I will lift the restrictions on the production of $50 trillion worth of job-producing American energy reserves.”
- “One of my first acts as president will be to repeal and replace disastrous Obamacare, saving another 2 million American jobs.”
Given such statements, it is natural to expect that Mexico, China, Japan, Italy and America would be affected by the new president. So would be their markets and currencies. The forex market was reflecting every single word of Donald Trump and every poll and debate before, during and after the election.
Markets Before the Election
The forex market revealed its reaction to both of the US presidential nominees during polls publications and debates. Hillary was deemed to be a continuation of the current presidency since she represents the same political party as Barack Obama. Thus, markets were feeling safer with Hillary as a potential president and this bated market’s uncertainty. For instance, when the FBI announced reopening the investigation of Hillary’s private email server and mishandling the information while she was performing as US Secretary, the investors kept a risk-aversion stance by shifting in safe-haven assets and currencies like Japanese Yen, Gold and Swiss Franc. The Swiss Franc is an asset traditionally used in times of uncertainty; however the Swiss National Bank had proven in the past that it is ready to take any measures possible to protect its currency value, in contrast with the Bank of Japan which seems to be out of solutions. Let’s have a closer look at forex market reaction to the two parties.
The Mexican peso has been a popular proxy for the US election since Donald Trump stated his plans of protectionist trade measures against Mexico, as well as to build a wall between the two countries. When polls results and media coverage were in favor of Hillary Clinton, the Mexican Peso surged against the US Dollar. Conversely, when the publications supported Donald Trump’s election, we saw the Mexican Peso sink. Examples of such events are highlighted in the below daily chart of the USDMXN. On July 30th, September 26th, October 19th and November 7th the fundamentals were released in favor of Hillary Clinton while on August 17th, September 11th and October 28th the releases were on Donald’s Trump side. It is obvious from the below chart that USDMXN topped on possible Trump’s election and bottomed on possible Clinton’s election.
The protectionist trade measures that the President-elect promised to take were not only affecting Mexico and Mexican Peso but also the economies of the USA’s major trading partners: first of all, China and then Canada and Mexico.
As a result, the Canadian Dollar and the Chinese Yuan were expected to be under selling pressure upon Donald Trump’s election. As we stated in our pre-election market analysis, we would closely watch CADJPY and CADCHF due to the risk aversion view of the latest two currencies in case of Trump’s win. The strong negative correlation between the possible fall of Canadian Dollar and the likely demand increase of Japanese Yen and Swiss Franc could drive the two pairs to new low levels. On the other hand, Hillary’s win was expected to likely increase the value of those two pairs and reverse the downtrend they experienced before elections.
It is also worth mentioning that before the election the markets reacted to polls predicting Hillary Clinton to be the next president.
Markets During the Voting Procedure
The market overreacted during the reporting of the states’ votes since the volatility was similar to the one we saw during the Brexit vote. For instance, within 5 hours, before the official results came out, the Euro jumped 300 pips against the greenback. Once Mr Trump had his first speech as the next President of the USA, the market recovered and the US Dollar ended up in gains, i.e. the EURUSD fell by 400 pips from 1.13 to 1.09. The day after the election, the forex market was consolidating with the Dollar gaining strength, in market’s effort to digest the new information and Donald Trump as the next US President. The graph below represents the daily change of the US Dollar against the G7 from the volatile time of 03:00 am server time (GMT+2) November 9th to 03:00 am server time of November 10th. In most of the cases the pairs recovered within the next day. The most notable pairs that did not recover fully within the last day were the commodities pairs and of course USDMXN.
Donald Trump did not mention his protectionism trading measures in his victory speech; instead he spoke about nation’s deep divisions that must be healed. His words were “I pledge to every citizen of our land that I will be president for all Americans”, which is something completely opposite to what he was propagating during his campaign. There’s no doubt that Trump is full of surprises, and we will be watching his next steps closely since they will affect many economies, including the world biggest economy. Today, the Mexican Peso and Chinese Yuan are falling and the US Dollar is getting stronger. Another industry which is expected to rise, and rose during the announcement, was oil and natural gas sectors since Donald Trump said he would offer more land to extraction industries.
Markets After the Official Election Results
A Nomura survey of investors before the elections revealed that Latin America has a chance of 54.6% to be affected under Trump Presidency, Asia 32.1% and EMEA 13.3%. Asia and more specifically China are running on significant risks due to the new US President. Donald Trump called China a currency manipulator and he signaled that he would punish the country by cutting up the Chinese imports to the US. There are two major risks if Donald Trump keeps his promise. Firstly, the Chinese economy which is export-based is going to be threatened since USA is their biggest export partner. This is very sad if we think that the Chinese economy has just started stabilizing. Secondly, Trump’s possible import cuts could trigger a trade war between the two economies.
The Commonwealth Bank of Australia estimated that if Donald Trump is going to materialize his promises about China, the Chinese shipments to the US will face a cut of 25% within the first year. The Chinese Yuan sunk right after the official announcement of the new President and it is expected to continue falling until further negotiations or speech by the President. The Yuan is currently trading at a 6-years low against the US Dollar and if Trump’s policy is going to be implemented it is going to close at a lower rate for the 3rd year in the row. USDCNY is currently trading at around 6.8, experiencing a depreciation of 6% in contrast to March 2016. At the beginning of the year, the analysts were talking about Chinese Yuan to end the year near 7 a Dollar, which is not impossible.
Mexico is the first country to be worried about the newly elected 45th President of the United Stated. The Mexican Peso surged to 20.8 during the votes reporting procedure, having later recovered some of its losses after Trump’s speech regarding a united nation. However, the Mexican currency could not keep it up and is again trading around 20.8 per Dollar and it is about to create a new low of more than 2 decades. Since April 2016, the Peso fell by 22%, from 17.04 to 20.8! We see the pair surging to new highs, the next resistance to be reached is the psychological level of 21 and then Mr. Trump is about to set the pair’s direction according to his words and actions.
According to Trump’s campaign, he is going to reduce the unemployment in the country and increase the income from taxation, which is actually called fiscal policy in the financial world. That really makes us think about the impact of the new US President on Fed’s current monetary policy. If we think of all those jobs that Trump has claimed to open for Americans, then US is heading towards great inflation and unemployment rates. That of course would make the greenback surge, likely beyond the Fed’s expectations and targets. Fed members mentioned many times that they were worried about economy’s overheating and that was the main reason that holds them back so far from raising the interest rates. December’s rate hike by the Fed was given a chance of 76% at the end of the previous week. The polls were indicating that Hillary Clinton will be the next president, so the rate hike probability within the first days of the week was hiked at 82%. However, right after the elections result, the Fed Future Data lowered the Fed’s Rate hike likelihood giving a new chance of 47% to a rate hike on December. A failure of the Fed to raise rates for at least one time in 2016 would most likely undermine Fed’s credibility since at the beginning of the year we were looking for 2 rate hikes.
As America and the world are coming to terms with the Presidential election results, the uncertainty will most likely continue for months leading up to Trump’s inauguration in January 2017. The next interesting event for investors should be Federal Reserve’s December policy meeting and whether they would take any actions or refer to fiscal policy. Meanwhile, we can benefit from the high volatility that market is sure to be experiencing in the near future.
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June 8, 2017
June 6, 2017