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    Brexit, Part II: Banks, Traders Weighing Trump Win Scenario

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    Should Donald Trump win the US presidential election, stocks are poised to drop and debt and commodities slated to gain, with economic acceleration in sight due to the projected narrowing in foreign trade deficit – the path chartered by the UK in 3Q16.

    Kristian Rouz – As American voters head to the polls on Tuesday, market participants and financial enterprises are cautious after Monday’s rally in stocks: the possibility of Republican presidential candidate Donald Trump’s electoral victory is bearing signs of similarity to late June’s Brexit in terms of the anticipated impact to assets valuations. While the Democrat candidate’s victory would result in a predictable relief, the economic reform agenda put forth by Trump leaves little doubt of sweeping structural shifts that would reshape the existing market architecture. Subsequently, traders will be closely watching exit polls on Tuesday, with an itchy finger for trigger-buys into havens should the ‘Trump market’ prevail.

    The ‘Trump market’ phenomenon that has dominated the S&P index throughout October and early November with the Republican nominee’s spectacular surge in polls, rally turnout and more focused and put-together persona, is primarily characterised by declines in stock value, higher volatility and better positioning of debt, gold, and, to some extent, commodities. The S&P has failed to rally by October 31, suggesting that the odds of a Democrat election are much lower, as evidenced by the recent US political-economic history.

    Unless the S&P index posts increases between July 31 and October 31, the administration in the White House has gone to the rival party throughout the second half of the 20th century and early 21st century, with the notable exceptions of 1956, 1968, and 1980. This time around, the S&P Index stood at 2,170.34 on August 1, 2016, declining to 2,126.15 by October 31, and further slumping to as low as 2,085.18 by November 4.

    Such an indication of a possible Trump victory has rendered banks wary of the emerging market trends typically accompanying the tumultuous periods of economic reform.

    One of the US largest banks, Morgan Stanley, has advised its personnel to consider resorting to stop-loss orders which is an algorithm selling the investor’s position as it reaches a certain level of low. The use of hedge mechanisms is well-grounded: on the day after the Brexit referendum, the S&P index dropped 3.6pc.

    US stocks are consensus-expected to either drop or gain 2pc depending on the outcome of the election. Trump is bad for stocks and Wall Street, however, there is a silver lining for the volatile assets: infrastructure and longer-term equities, such as utilities, are well-positioned to gain should Trump win.

    The dollar is expected to depreciate in a ‘Trump Win’ scenario, similar to the post-Brexit dynamics in the British pound. This would support the US exporters’ competitiveness and contributing to a further narrowing of the US foreign trade deficit, thus indirectly supporting economic growth (at least 1pc of the 2.9pc expansion in the US GDP in 3Q16 was attributed to a slightly narrowed trade deficit).

    “We do not expect to see a massive collapse or spike,” Chris Weston of IG Markets in Melbourne said, having noted the firm has raised its margins for US stocks and the dollar from 0.5pc to 1pc.

    The UK-based multinational banking giant, HSBC, has increased its staffing on the trading floors worldwide for the US election day in order to ‘appropriately react to client requests’. In fact, the financial professionals want all eyes on the market and polls so that they don’t miss the moment of truth, either by dropping or buying into havens.

    "Around any high profile, potentially market-moving event, it is not unusual for some trading desks to increase staffing levels," HSBC spokesperson said.

    US Treasuries would go up in value, with yields declining upon Trump’s potential victory. However, as suggested by Trump’s reform agenda, decreases in taxes and fiscal stimulus might result in a rebound in stocks, particularly if the GDP expansion gains momentum. Debt would subsequently retreat and yields would advance, especially in the light of higher market volatility.

    In commodities, a Trump administration would likely be favourable for oil, coal and natural gas, particularly due to greater isolationism in foreign trade and scepticism of the Middle East. Emerging markets would likely tumble facing declining exports to the US – with one notable exception, Russia, capitalising on rising fuel prices and foreign trade in technology, including rocket engines.

    All in all, in line with all the similarities with Brexit, the medium-term outlook in the ‘Trump Win’ scenario remains bright, given the UK’s economy’s acceleration in its first post-Brexit quarter. Would Trump avert the looming recession? Given the structural nature of the upcoming crisis, his reform agenda could help ease the most acute negative impact of trade and the international exposure of the US economy. The morbid quiet of a Democrat victory, however, would only temporarily relieve the financials, leaving the Main Street on its road to eventual demise of recession, akin to the Recession of 1938.

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    banks, economy, Brexit, Morgan Stanley, S&P, Donald Trump, EU, United Kingdom
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