Complex Made Simple

Two days to D-Day: What if your worst fears come true?

* Clinton holds 48 per cent to 43 per cent lead in Washington Post-ABC Tracking Poll

* Investor confidence may fall dramatically in the short term, meaning losses in the S&P 500

* Mexican pesso’s losses in the event of Trump’s win may even reach 15 per cent

 

It is apparent that not many people like Donald Trump, the Republican candidate for the 2016 US presidential elections. Still, the business magnate has able to amass a huge following during his campaigns and he is close to achieving something that many believed impossible.

With two days to go for the results to be unveiled for the US elections, which grabbed the attention of the whole world, particularly the Middle East region because of Trump’s controversial remarks on Muslims, immigration and wars, his Democrat rival Hillary Clinton holds a five-point lead in the latest Washington Post-ABC Tracking Poll, released early on Sunday.

The poll, carried out between November 1 to 4, shows that the former US Secretary of State has a 48 per cent to 43 per cent lead. In the previous Washington PostABC survey, carried out between October 27 and 30, Trump had scored a 46 per cent to 45 per cent lead over Clinton.

As the election race draws to a close, it is too difficult to predict who would become the next president of America. But the worst fear of many is all about the consequences of Trump winning the elections.

Below, FXTM’s Chief Market Strategist and regular contributor on AMEinfo, Hussein Sayed, attempts to analyse what a Trump win means for financial markets:

This year, a new answer was born to questions such as: ‘Why is (insert surprising or shocking event) happening’? The answer is simply: ‘Because 2016’. Six months ago, most pundits called it a long shot that Republican candidate Donald Trump might win the US presidential elections. Then again…it is 2016.

A Brexit was also considered to be a long shot, and yet, Britain did indeed end up unexpectedly voting to leave the European Union, sparking waves of price reactions in the markets. Gold prices climbed so fast that investors got dizzy. The Sterling and FTSE fell off the edge of the cliff so rapidly that they left queasiness in their wake.

 So, what are the upsides and downsides to a Trump win? On the downside, it could be similar to the post-Brexit situation, with the S&P 500 taking the role of the FTSE. Investor confidence may fall dramatically in the short term, meaning losses in the S&P 500. The losses could be anywhere between five and ten percent for the S&P, ending the eight-year bull run. In this context, the VIX could soar, tracking potential volatility that might follow the unexpected result of the election.

 The other asset to take a lead role in this potential drama is the Mexican peso. Ever since Trump made an election promise to build a wall to keep illegal Mexican migrants out of the US, the currency has been the best financial asset proxy to signal a Clinton win and a Trump loss. The peso’s downward slide in the wake of the revelations over a new FBI probe into Hillary Clinton’s email issue, announced in the last week of October, is a fair indicator of the trend it might take in the event of a Trump win. The currency’s losses may even reach 15 per cent.

 It’s debatable whether the US dollar would take a hit or be a hit, given that the currency is often seen as a safe haven in times of volatility. On balance, the USD could maintain and even rise against its rivals in the case of a Trump win, especially considering the Federal Reserve’s interventionist policies and caution since 2007. There’s little doubt, however, that another other safe-haven asset – Gold – would be preferred by traders. When the markets lose their risk appetite in the face of a short, sharp shock, they turn to Gold for comfort.

On the upside, an initial sell-off would create opportunities for smart money to dive in and take advantage of the market correction. Something similar was seen in the wake of the Brexit when the FTSE regained ground on bargain buying and central bank easing hopes.

In the medium term, there could be additional developments in terms of investor sentiment. Businessman Donald Trump has made much of his economic policies, such as cutting red tape – measures that are likely to be popular with US companies. If his presidency becomes a reality, mergers and acquisitions activity could be boosted and could flourish because of fewer regulations seen as restrictive or complicated.

Business-friendly policies could also contribute to a reinvigorated financial services sector and investor confidence could return in earnest for the first time since the sub-prime crash in 2007. Stocks in the biotech sector – which suffered losses in the wake of Clinton’s criticism of EpiPen’s price hikes – could recover quickly if Trump is victorious.

 A win for Hillary Clinton has already been priced in by the markets ahead of the elections, yet, as always, when it comes to expectations, they can be disappointed. After all, it is…2016.