We are less than a week away from the US presidential election, arguably one of the most volatile events of the year for the global financial markets. That volatility was on full display earlier this week as US stocks plunged to four-month lows, while safe-haven gold and silver bullion spiked to nearly one-month highs. The losses weren’t just limited to Wall Street. By Wednesday, Australian stocks were also poised to hit four-month lows as investors continued to speculate about the outcome of the US presidential race. [1]
The markets nosedived after a fresh batch of polling data showed growing support for Republican candidate Donald Trump, a divisive figure who is widely expected to shift the course of US policy. Change of this magnitude, and its potential impact on the global financial system, has raised an army of economists, analysts and traders against the GOP candidate.
According to Real Clear Politics, Trump is now polling ahead in two major national surveys. The ABC/Washington Post tracking poll shows 46% of likely voters favour Trump, compared to 45% who back Clinton. The LA Times/USC poll tracker showed a four-point lead in favour of Trump. The IBD/TIPP poll suggests Clinton has a mere one point advantage over her Republican adversary.[2]
We’ve already seen what growing momentum for Trump might do to Australian (and global) stocks. As Clinton gets more bad press from the email server scandal, where she reportedly mishandled classified information, Aussie traders may see a further nosedive in the S&P/ASX 200.
Reserve Bank of Australia (RBA) Governor Philip Lowe has already warned Aussie traders that the reaction to a Trump victory may be sharper. In his view, “the possible election of President Trump wouldn’t be as benign an event” as Brexit turned out to be.[3] In other words, traders may get a reaction worse than the Brexit fallout should Trump win the White House. (Remember, Brexit led to the biggest two-day stock market selloff ever.[4])
Trump’s criticisms of the Federal Reserve and preference for low interest rates may also lead the US central bank to become more politicized, thus undermining traders’ confidence in the institution. If this were to happen, a large drop in the US dollar and higher US bond yields, which could send the Australian dollar higher, may be the result.[5]
However, there’s another equally compelling argument. According to Commonwealth Bank, Trump’s domestic policies, including corporate tax cuts and trade tariffs, might lead to inflationary pressures that may require the Fed to hike interest rates much more quickly. This might lead to a 10% rise in the US dollar and a 10% plunge in the Aussie.[6] With Trump, it seems, there’s really no predicting what might happen. This means that the wild fluctuations in the AUD/USD over the past month may just continue for the foreseeable future until the market gets a clear narrative of how domestic US policies will play out.
Trump has also shown far less flexibility than Clinton in participating in the Trans-Pacific Partnership (TPP), a free trade pact that includes Australia. One thing seems clear: Australia stands to benefit a lot more by boosting trade with China should Trump get elected. In fact, Trump’s hardline stance on Chinese trade practices and other economic policies could lead Beijing away from US shores.
Finally, fears of a Trump presidency on November 8 may create bigger demand for gold, the world’s preferred safe-haven. Gold prices spiked to four-week highs on Tuesday as presidential election jitters took root. [7] Any reference? The yellow metal may receive greater buy-in as the days roll on – that is, if the polls continue to show momentum for the GOP candidate.
Aussie traders may have less to worry about should Hillary Clinton get elected – at least in the short term. This has less to do with politics and more to do with the fact that Clinton is an establishment candidate who is far less likely to rock the boat. If anything, she will follow President Barack Obama’s existing economic policies and maintain good relations with trade partners.
However, the real challenge with Clinton is her stance on foreign policy. This is the same leader who has threatened to bomb Iran[8] and argued for a military response to the Russia’s perceived aggression.[9] Geopolitical conflicts with Russia and Iran might not necessarily appeal to Australian traders, who are more accustomed to stability, strong trade and steady economic growth.
The impact of a Clinton presidency on Australian traders may take much more time to materialize. The effect of a Trump presidency will possibly be felt almost immediately. Once again, this has much more to do with the fact that he’s an unproven commodity when it comes to US politics.
Trump’s anti-establishment approach has already proven effective with voters. For traders with a vested interest in the financial markets, his election to the White House may be a tough pill to swallow.
[1] Reuters (November 02, 2016). “’Big Four’ banks lead Australian shares lower; NZ also down.”
[2] Real Clear Politics. Latest Polls: Tuesday, November 1.
[3] Saul Eslake (October 26, 2016). “A Trump presidency ‘could bring a range of economic disasters’.” ABC Australia.
[4] Javier E. David (June 27, 2016). “Brexit-related losses widen to $3 trillion in relentless 2-day sell-off.” CNBC.
[5] Saul Eslake (October 26, 2016). “A Trump presidency ‘could bring a range of economic disasters’.” ABC Australia.
[6] AAP (September 27, 2016). “Australian dollar tipped to fall if Donald Trump is elected President.” ABC Australia.
[7] Usagold.com (November 01, 2016). “Stocks fall as Gold Climbs With Swiss Franc on Election Anxiety.
[8] Stephen Lendman (July 5, 2015). “Hillary Clinton: “If I’m President, We Will Attack Iran… We would be Able to Totally Obliterate Them.”” Centre for Global Research on Globalization.
[9] Jason Murdock (September 1, 2016). “Clinton: US should use ‘military response’ to fight cyberattacks from Russia and China.” IB Times.
