US Election Outlook for Forex, Commodities and Stocks

INTRODUCTION

The U.S. presidential elections in 2016 was one of the most memorable events of the year. The almost two year process that kicked off with various candidates announcing their intention to run for president, the primaries that selected each of the candidates to represent the two major parties, and the televised debates that broke audience records came to an end on November 8, 2016. Election night 2016 proved to be another one for the history books as Republican Donald J. Trump pulled off an upset by scoring a decisive victory against his opponent.

Global markets abhor uncertainty. The tighter the presidential race the less clarity on a single outcome creating anxiety in investors. The market is unbiased and favors no side over the other, but its preference is for a clear advantage even if the outcome unexpectedly shifts at the last minute. The close race by Secretary Hilary Clinton and Donald Trump was a rollercoaster that played out in all media channels for the world to experience. Markets reacted with shock as Trump scored early wins as Democrats awaited a late surge that never materialized, but ultimately prices rebounded once a winner was declared when Clinton conceded via telephone. 

Markets are not immune to political risk. Donald Trump will carry a huge burden as the 45th President and the executive powers that go along with the job. With the election behind here is an outlook of how the results of the US Presidential election will impact different asset classes. 

Donald J. Trump Inauguration Update

January 20 will mark the first day of Donald Trump's presidency. After a long campaign that ended with the victory of what was at first a surprise Republican primary candidate, unexpected nominee and finally the United States of America's 45th president.

Trump's style has not changed after winning the elections and he has not slowed down in his eagerness to dictate policy. His transition team has already hinted to at least five executive actions to be signed after he is sworn in office. Markets have risen due to his comments on infrastructure spending and fiscal stimulus. The dollar has surged as inflation expectations will keep the U.S. Federal Reserve on a faster monetary policy tightening pace.

The dollar and global stock markets did not look as kindly on his comments of currency manipulation by China as well as his anti-trade comments made by calling out global corporations for not investing in the U.S. and threatening to put a border tax in place. The NAFTA treaty could be one of the first casualties of his administration as Wilbur Ross, the U.S. commerce secretary nominee, has already said that all aspects of the trade deal will be under review once the new administration is in office.

IMPORTANT DATES

Tuesday, November 8 US Presidential Election

Monday, December 19 The members of the Electoral College formally vote for President and Vice President.

January 6, 2017 President to be announced by the U.S. Senate

January 20, 2017 Inauguration

US Election impact on: Currency Markets

The U.S. dollar has appreciated since the Federal Reserve tapered its quantitative easing (QE) program in 2014 and hiked its benchmark interest rate in December 2015 for the first time after the financial crisis of 2008. The Fed is widely anticipated to again issue a single rate raise in the last meeting of the year. The autonomy of the U.S. central bank is not under threat regardless of the Donald Trump's victory. In the aftermath of the elections there are rising doubts about the Fed following through on its hike of interest rates at the end of the year. The results of the elections are a leading indicator and have had no influence in the current state of the American economy. Employment and inflation prospects remain unchanged and the U.S. central bank if it sticks to its mandate is on target to deliver another annual 25 basis points interest rate hike. 

Trade deals like the Trans Pacific Pact (TPP) on the other hand will most likely be revised with a risk of the U.S. not ratifying the agreement. This will have negative connotations for Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Not to mention the lost opportunities from U.S. importers and exporters to be part of the largest regional trading zone. The impact of losing the TPP won’t be as harsh on the USD as Brexit was on GBP. The yet-to-be signed TPP deal is still waiting to be ratified by all partners while Brexit is an end to the existing trade pact with the European Union. 

NAFTA currencies (CAD and MXN) are under pressure given Trump's campaign promises to renegotiate the trade deal between the North American countries. The Mexican peso has operated as a proxy for emerging markets in Latin America for the past two years thanks to the high liquidity of the currency, but gained an inverse correlation to the fortune of the Trump campaign. The higher Trump was ahead of the election the lower the peso would fall versus the US dollar. The eventual victory at the presidential election has put the MXN at a post 1994 crisis low. There are a lot of unknowns about how the Trump presidency will unfold and his trade and tariff agenda is one that will impact the NAFTA currencies going forward. 

Monetary policy divergence has driven the USD higher against the majors and there seems little room to maneuver for the European Central Bank, The Bank of Japan and other central banks that need to tighten monetary policy at the same time the Fed is raising rates. The cautious stance of the U.S. Federal Reserve has put those central banks on the spot and forced them to go beyond conventional tools into untried territory like negative rates and bond purchases. The Fed can exercise patience, as there is little risk that the economy will "run hot" with inflation before it has time to act. If a Trump win derails the Fed's plan to raise rates in December the pressure will be on other central banks that are dealing with more pressure to act. The ECB and the BoJ are running out of options and could further turn into more unconventional tools to boost growth after the lack of success of more traditional monetary policies. 

US Election impact on: Gold^†

The yellow metal returned as a favored option for those traders seeking a safe haven during turbulent times. 2016 has been full of uncertainty as market sell offs and political events like Brexit have shocked markets boosting gold as an alternative asset class. Inflation remains tame around the globe, but there are signs that the U.S. is on track to meet its inflation and growth targets next year which would accelerate inflation expectations and benefit gold. 

The price of XAU went up during the more turbulent hours of the election as it became obvious a Trump victory was in the making. Gold is close to trading at pre-election lows from five weeks ago after investors have witnessed a peaceful transition after the presidential election upset. 

US Election impact on: Oil^†

After a free fall in the two previous years the Organization of the Petroleum Exporting Countries (OPEC) managed to find a way to keep prices stable. Communicating out in the open with other producers about a possible oil output freeze accomplished the unthinkable as major investment banks were already forecasting $20 barrels of oil. The implosion of the Doha agreement did little damage as disruptions to supplies due to natural disasters or social unrest kept the price within the current range. 

Given the mercurial nature of major crude producers there is still a chance the deal never materializes, or even if the deal gets signed it could prove too difficult to monitor and audit individual outputs as cooperation from all is needed to stabilize crude prices. The outcome of the U.S. elections could be relevant, as diplomatic relations with some major producers has been strained during the presidential campaign. The U.S. became a net exporter of energy for the first time since the 1950s this year reducing its dependency on foreign oil. The surge of alternative energy sources has also reduced the global appetite for crude, which is expected to reach its peak in 2030, only to slowly be replaced from that date forward. Donald Trump campaigned on a tougher stance against Iran which could see a reversal of the removal of sanctions after the nuclear deal was agreed. OPEC members continue to pump at record levels and so far only supply disruptions, natural or geopolitical have effectively curbed the amount of crude in the market. 

US Election impact on: Stock Markets^†

Despite the political campaign rhetoric the performance of the stock market has not correlated closely with a particular party or agenda. Now more than ever the global macroeconomic events that shape the health of the economy have more of a guiding hand on the market. 

Central bank policies that keep interest rates lower for longer have boosted stock returns as investors search for higher yields. The Fed rate hike in December is positioned to have a bigger impact on global markets than the final outcome of the U.S. 2016 presidential election this year and into the next.

That is not to say that the elections process does not influence investor confidence but as stated before it has a lot more to do with the uncertainty of the outcome. Even when the outcome is unexpected but shocking like decision by the British voters to leave the European Union the market will have a period of volatility until it finds stability and goes back to trading on economic fundamentals. Global markets reacted poorly when the election went against the pollster predictions but in a matter of hour as a Trump presidency became a foregone conclusion markets recovered from losses in the Asian session and ended up in positive territory. As with other asset classes, there are still a lot of unknowns surrounding the direction the President-elect will take America with the market reacting as new information is released. 

SUMMARY

Historically the U.S. dollar has gone into elections weaker and once uncertainty is gone, the USD has a slight appreciation. This time around the greenback is boosted by the expectation of an interest rate hike in December after the U.S. economy lost momentum in 2016 but it forecasted to ramp up again next year regardless of who is at the helm after inauguration day on January 20. Trump's victory has not taken a rate hike off the table in December so the USD monetary policy divergence will remain as the ECB and BoJ are set to launch more stimulus measures as the Fed raises rates in December ahead of the newly elected president's inauguration on January 20, 2017.