U.S. elections don’t normally elicit major market volatility but the problem in 2016 is that for the better part of this year, market participants did not consider a Trump victory realistic, and now that the election is too close to call, they are bailing out of U.S. assets and rushing to protect their portfolios.Regardless of your political leanings, it is hard to ignore the fact that investors fear a Trump Presidency. His foreign policy, trade ideas and plan to overhaul the Federal Reserve scare domestic and foreign investors alike and the general lack of specificity could mean a long period of uncertainty. Beyond the immediate impact, investors also worry that if markets sell-off and the U.S. economy slows, the Fed could forgo a rate hike in December, which would exacerbate the dollar's slide through year's end.
But what if Hillary Clinton makes history by becoming the first female president of the United States? The market’s reaction depends on the margin of her victory.
3 Potential Election Outcomes
- Scenario #1: Trump becomes President, Clinton accepts defeat.
The greatest market impact would be a Trump victory and a willing Clinton defeat. In this scenario, the U.S. will have a man with untested political skills and unknown policies in office. In this case, the biggest winners will be the euro, Swiss franc and Japanese yen while the biggest losers would be the U.S. dollarand Mexican peso. The Canadian dollar should also fall but its moves could be tempered by a weakening U.S. dollar.
- Scenario #2: Clinton becomes President, Trump accepts defeat
The greatest relief for foreign investors would be if Clinton becomes President and Trump willingly accepts defeat. She’s not without her own problems (and there are many) but the transparency of her policies and the continuity of stability would send the U.S. dollar sharply higher. In this scenario, the dollar and peso would rise against all of the major currencies with the biggest losers being the Japanese yen, Swiss franc and to some degree the euro. However she would need to win by an uncontestably wide margin and Trump would need to accept defeat, which he has suggested he will not do.
- Scenario #3: Trump/Clinton becomes President by narrow margin. Loser refuses to accept defeat.
The third scenario is the most likely. If Trump or Clinton becomes president by a very narrow margin and the loser refuses to accept defeat, the ongoing uncertainty would be extremely negative for the U.S. dollar, especially in the hours after the election. On a percentage basis, the greatest market volatility in financial assets (currencies, equities and commodities) will be in scenarios 1 and 2.
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