Research Team at Westpac, lists down the US election risks for equities and commodities markets by taking reference from the recent Brexit scenario.
- UK equities fell 9.5% from high to low in the day after the referendum but a recovery saw the net decline for the day trimmed to 3.1%. Equity market volatility on the otherhand rose sharply on the day and remained elevated, the VIX posting an intraday range on 24 June of 6.8pts and rising 8.5pts overall on the day.
- US equities can expect a similar reaction to a Trump win – a large intraday fall and potentially smaller net losses overall for the day. The caveat is that US equities are arguably less complacent - UK equities rose a solid 6.5% in the week into the UK vote while US equities are overall down in October, even allowing for Comey's letter absolving Clinton of any wrongdoing.
- UK equities staged an impressive recovery after initial Brexit losses, the FTSE rising 2.6% a week later and 6.2% a month later, lower interest rates and a sharp fall in GBP insulating equities. Domestically focused stocks underperformed while those that benefit from a weaker GBP outperformed. It’s not unreasonable to assume a similar longer term US equity market reaction under a Trump win – a weaker USD vs the majors (ex NAFTA and emerging markets currencies) and a sharp fall in US interest rates as Fed hike odds are trimmed sharply could conceivably help stabilise US stocks. If equities can look past the near term cloudy economic picture, the prospect of individual and corporate tax cuts and another potential Homeland Investment Act, encouraging repatriation of multinationals’ overseas earnings, would certainly be plusses for US stocks.
- Expect a similar outcome to Brexit - safe haven demand for gold should push it higher on a Trump win. Gold rose 5% in the day after the UK vote, those gains holding in subsequent weeks, though gold fell 3.7% in the week before the UK vote as confidence in a “remain” win grew. By contrast gold prices have risen modestly through October as Trump's odds have firmed.
- Oil prices fell 4.9% on Brexit, but in the week into the vote they rose almost 10%. By contrast oil prices have fallen sharply in October though increasing doubts around an OPEC production cut have been a very big part of the story. Regardless, risk aversion in the immediate wake of Trump win likely weighs on oil prices.”
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