Democratic candidate Hillary Clinton has a strong lead in opinion polls going into the US presidential election, with Republican Donald Trump struggling to bridge the gap. Polls can mislead, however, and the vote may be closer than currently assumed, meaning financial markets could be kept on their toes into November.
If Trump wins
While Clinton is the candidate of continuity with Barack Obama’s policies, Trump is firmly against the political ‘establishment’, vowing to break the congressional gridlock that has all but paralysed the legislative branch in recent years. While pro-business on paper, Trump’s populist stance on immigration, global trade and foreign affairs could be damaging to US growth and could increase global geopolitical tensions.
How foreign US Treasury buyers would react to a Trump presidency is uncertain
More specifically, we think a Trump victory could exacerbate volatility in some Asian currencies, particularly the Chinese yuan and the Korean won given his firm stance on Asian trade partners. We also anticipate that a Trump win would send US Treasury (UST) yields higher, as markets may re-price the risk premium. How foreign UST buyers would react to a Trump presidency is uncertain. Discussion in Congress around a potential repatriation of US corporate profits held abroad are worth watching, as they could help underpin the US dollar.
Trump’s appeal partly stems from entrenched economic malaise. While the US recovery from the 2008-09 global financial crisis has been stronger than that of other developed economies, gains have been unevenly distributed. Median incomes are stagnating, causing frustration. Globalisation and cheap imports from abroad are criticised for undermining the US manufacturing sector, where employment remains well below pre-crisis levels.
If Clinton wins
A Clinton win with a hostile Congress would probably mean a continuation of current trends. In other words, UST yields may continue to head lower over the next six to 12 months, likely prolonging the global ‘hunt for yield’, making high-yielding emerging-market debt more appealing.
From a global perspective, we expect minimal impact from the US elections on Asia’s economies, especially as the US role has diminished – in relative terms – in recent years. The US is no longer a dominant partner, with China and Asia ex-Japan now the key contributors to growth, both in Asia and globally.
A Clinton presidency could still be marked by economic turbulence
While a Clinton win means probably ‘more of the same’, investors should be aware that the US business cycle is in its ‘late stage’, in our view, with growth deceleration likely in 2017-18. In fact, the decline in GDP growth and car sales this year indicates that business growth may already be slowing. A Clinton presidency could still be marked by economic turbulence, and the worry is that both fiscal and monetary policies seem ill-prepared for slowing growth down the road.