Madam or Mister?
We are getting closer, the heat is on and one would say that there is a lot at stake. Anyway, will see on Tuesday night…
It all starts with Clinton and Trump, carries on with majority in Senate and House of Representatives and voters’ turnaround. The race is very tight and the lower participation can be advantageous for Trump. On the other hand, Clinton’s supporters see the chance to win back the Senate majority, while many Republicans have an issue with endorsing Trump.
What are our expectations?
Hillary in the Oval Office
- More or less status quo
- Not focusing on structural reforms
- Likelihood of escalation of conflict with Russia (Ukraine, Crimea, NATO presence in Eastern Europe, Syria)
Market reaction in case of Clinton victory
- Markets relieved as a first reaction and S&P 500 rallying for 2-3 days followed by a selloff
- May have a Christmas rally with S&P 500 extending to 2120, 2176 and highs around 2194
- But at a certain point, we will see the 1900 level as a part of healthy correction that is needed, may come in Jan 2017
- Biotech and pharma under pressure
- Supportive for USD and US yields
- EUR/USD heading towards 1.0500 in the light of Dec rate hike
- Strong selloff in JPY, CHF and EUR/MXN
- USD/JPY to extend to 105.00
- NOK, CAD, BRL on a positive note, AUD negative as it is living its own problems with household spending and housing bubble
- FOMC raising rates in Dec
- Gold to 1250 and then to 1235
Donald in the Oval office
- Unpredictable, but it is not going to be that bad as general expectations are
- FOMC on hold in Dec
- Fed officials changes in 2017 – what’s Trump view of Fed’s role?
- New fiscal stimulus
- Trade protectionism
- Will agree with Russia on the spheres of influence and new world order, thus risk of escalation or military conflict may to great extent vanish
- US companies may suddenly sign interesting investment contracts in Russia, which can in turn support US equities in medium term
- Putin’s top candidate, as he likes Western leaders who create chaos and opinion/policy division
- Some US citizens leaving the country and taking up residency abroad. Like we saw last time after Bush being elected and few Americans moved to Canada.
- Increased tensions with China in South China Sea, as China started to build artificial islands and Philippine’s president dropped the close relationship with US in favor of stronger ties with China. All of that happening in the region where important naval merchant routes are controlled by US.
Market reaction in case of Trump victory
- In case of a decisive win we may experience extremely high volatility and lack of liquidity across many asset classes
- This can commence after 2:00 am GMT, as the market will start to have a good indication of the potential outcome (either decisive win or still ongoing tight race)
- Risk assets selloff as an immediate reaction
- S&P 500 breaking through 2082 and 200 DMA, next target is a range between 1999-1991 (10% correction from the highs)
- Buying dips into 1900 maybe 1800 levels but again, the healthy correction in stocks is needed as mentioned above
- Biotech and pharma strongly rallying - watch the IBB (Biotech ETF)
- Coal ETF (NYSE:KOL) rallying despite the nice and steady rise in 2016
- USD/JPY with strong support at 102.80 and 100 DMA, and then looking at 100.00 and 99.00
- EUR/USD to 1.1300, then to 1.1500 as round levels
- Weaker USD and US yields dropping in safe heaven flow; USD may weaken 3-5% but lack of liquidity can enhance it to a 5-8% one-off drop; all of that will be driven for 2-3 days by hot and smart money and then we will see USD buying again as nothing is really changing to the current FX trends
- Gold in demand, now trading around 1300 to extend to 1350 but later come back to 1300 again; Gold vols up and Risk-Reversals trading at the levels seen during Brexit and Q1 2016 general selloff.
Good luck Champs!
Mr Hawk
Land of Trading