A Clinton win will re-establish current market trends in equities and bonds as well as monetary policy, with a likely rate hike in December. We have a bias towards a slightly higher U.S. dollar against non-cyclical currencies (i.e. Euro) but see the greenback underperforming cyclical currencies such as emerging markets. We expect some fiscal policy and a continued leading role of the U.S. in world affairs, albeit a declining one. The future of the Trans-Pacific Partnership (TPP), an important and symbolic trade agreement with Asia, will still be very much in doubt and is likely dead. Finally, we see high yield and investment grade spreads continuing to narrow modestly.
With the FBI statement that nothing new transpired from the review of the Clinton e-mails in the closing hours of the campaign, markets are likely to price in a Clinton victory once again.
The following will thus concentrate on a Clinton victory and the implications for markets. A Trump victory would unleash considerable uncertainty and market turmoil, at least in the short term. In the unlikely event this occurs, we would review our positions and follow up with another blog.
A Clinton presidency will come with the weakest mandate since the post-war era, given the divisive nature of the campaign and the distrust in not only the candidate but the political system that Trump has so adeptly exploited with claims of a rigged system.
The difficulty for a Clinton administration and enacting any fiscal expansion she has advocated is that Congress will almost certainly remain Republican, while the Senate may turn narrowly Democrat. Such a scenario is positive, at least in theory to getting some bipartisan agreement but that is not a certainty.
On fiscal policy there exists enough common ground between centrist Republicans and Democrats to get something done in Congress. In all likelihood, this would involve some fiscal policy to rebuild U.S. infrastructure paid with some tax reform to allow offshore company profits to be repatriated at a lower tax rate.
However limited Clinton’s political capital is, it is juxtaposed with the establishment wing of the Republican Party; the ones most likely to work with a Clinton administration. They would fight against alt right Trump surrogates and tea party members who liken the Republican establishment to the rigged system and will likely do everything to try and thwart any Clinton legislation.
So while there is cause for cautious optimism on fiscal policy in the near term, the longer term is very unclear as to the future of policy and legislation if gridlock remains the modus operandi in Washington.
Markets should be positive into year-end under the scenario outlined:
- Global equity markets should continue to rally on the back of improving earnings.
- Emerging equity markets should continue to rally with the help of continued lower rates, financial healing with economic improvement assisted by modest structural reforms in many cases.
- Investment grade and high-yield spreads should continue to tighten modestly.
- Rates in the long end should hold steady to slightly higher while the shorter end rises resulting in a modestly flatter yield curve.
- Outlook for the financial sector in the U.S. have improved thanks to anticipation of a steeper yield curve, which may stall post the election at least temporarily. Continued outperformance will be reliant on continued economic growth but enthusiasm will be tempered with Clinton likely to advocate more regulation for the sector, something requiring congressional approval. More regulation, making banks more solvent is positive for our large financial holdings in investment grade bonds.
- Health care is very much oversold on the back of fears of a Clinton presidency and legislation to limit drug prices. This requires passage through Congress. This is largely discounted and a short term rebound is anticipated.
In conclusion, the outlook for markets is positive and our regime change thesis continues afoot. But in spite of this optimism, the U.S. political landscape will likely remain precarious which is likely to impact policy, including monetary policy.
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