The US presidential election is scheduled for tomorrow, 8 November 2016. In order to win the election the candidate needs to win 270 out of the 538 electoral votes. The number of electoral voters in a given state is equal to the total number of seats in Congress. The more populated states are, therefore, the most important states to win.
For example, Florida, Ohio, Virginia, Pennsylvania and Wisconsin hold 90 electoral votes, while California and Texas have 93 votes between them. Furthermore, since 1964, Ohio and Florida have voted for the winning candidate every time except in 1992 when Florida had a Republican majority and Bill Clinton won. (See attached chart showing Clinton’s and Trump’s chances of winning each state according to the latest polling. Please note that in general it can be argued that polling surveys have become a less reliable predictor of the outcome).
There are a number of important difference in policy approach between Clinton and Trump, especially regarding foreign trade, immigration, monetary policy, taxes, and foreign policy regarding the role of Mexico, China and Russia (please see summary chart attached). We will highlight the winning candidate’s policy statements more fully on Wednesday.
From a broader economic perspective, the following facts are, perhaps, worth noting:
- In the past, Presidents have delivered-on an average of 67% of their electoral promises (although the percentage has systematically declined over time.)
- Both Clinton and Trump want to expand infrastructure investments (public and in partnerships with private corporations)
- A key part of Trump’s campaign is to shield US workers from globalization. A Trump victory could lead to more trade wars.
- If Hillary Clinton wins, she is most likely to stick with Janet Yellen as Chairman of the Federal Reserve (assuming Yellan wants a second term). In contrast, Trump has said that the Fed has created ‘a false stock market’ and that Yellen is ‘very political’. Trump is unlikely to reappoint Yellen for a second term simply because she is a Democrat.
- According to Trump, China is the main enemy not Russia.
- Trump has argued for the careful screening of each individual entering the country and the extreme vetting of immigrants from troubled parts of the world. In addition he wants the temporary suspension of immigration entirely from regions where safe and adequate screening cannot occur. Immigrants account for nearly 17% of the US total labour force. Mexican immigrants account for 28% of total foreign born population.
- Republican presidencies have been bearish for the US Dollar since mid 1980s. But there has been higher economic growth under Democratic presidents (an average of 4.1% GDP growth) compared with Republicans presidents (an average of 2.5% GDP growth). This may provide part of the reason why the USD has been stronger (see chart attached).
- There is no clear tendency for what happens to the US Dollar immediately before and after election – it takes time before economic policies take effect. (From our perspective the USD is fundamentally overvalued vs the EUR).
- Mexico and MXN, given its large trade share with the US and Trump’s sharp rhetoric, might be the main loser if Trump wins. In contrast, Russia and RUB could be a winner in the case of a Trump presidency. China and CNY may be targeted in the short term under Trump, but a Trump presidency cannot afford to maintain a hawkish stance in the medium term given the importance of China’s market for the US.
- In general, US equity markets react to economics and ignore geopolitics. But, historically, US equities have on average rallied just after the election, but it is difficult to say anything about the link between US equities and elections in the long-run. The historical data suggests that in the first three months after an election US equities have gained an average of 3%, with a democratic winner yielding a gain 5% in equities and a republican winner providing a gain of 1%. We would, however, be concerned about the impact on US equities if Trump wins given the heightened policy uncertainty.
- In terms of the bond market, it can be argued that there is some upside risk for yields if Trump wins. This is due to the expectation of a larger fiscal deficit, potential rating downgrades, more protectionism, and a more hawkish stance on rates. However, any upward move in yields could be relatively modest. A Clinton victory would be seen as more of the same or ‘business as usual’ and the immediate impact on the US fixed income market should be negligible.
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