Article by: Serhiy Fursa
If the markets are wrong and Trump wins tomorrow, a “black Wednesday” awaits us. The stock exchange prices will fall sharply, the dollar will peak, and gold prices will soar.
On Monday, November 7, there was a practical celebration on the world stock markets. At least, so it seemed, given that almost all the key indexes soared. And the most important indicator was that the American S&P 500 index grew by almost 2%.
And what was it that so pleased the speculators and investors? The industrial growth in China or Japan, the employment growth in Europe, or the drop in oil prices? No, it was for an entirely different reason — election polls indicated that Hillary once again was leading Trump.
The financial markets and almost all the system players in the world economy are set against Trump. There are many reasons for this, but the basic reason is the personality of Trump himself. Hillary is not liked in the US, where she is viewed as cold and calculating. And she would lose to any other Republican. But not to Trump, whose populism frightens the elites.
As usually happens after multiple crises, the popularity of populists is growing in the world today, as was the case before World War II. The inept president of the Philippines shoots drug dealers and anyone who is in the way while confessing his love for Putin. Erdogan in Turkey is assuming the title of ruler of the Ottoman Empire, alarming his neighbors. And throughout Europe, one by one, the far-right candidates are winning. The US is not far behind; it is against the background of the same trends that Trump has been able to attract so many followers.
If Trump wins, it means that a critical mass of idiots would now be in power, a situation that usually leads to unpredictable consequences.
Second, markets really do not like administration changes in the White House. It does not matter if a Republican replaces a Democrat or a Democrat a Republican. There is a change in policy, and this unnerves the markets.
Finally, investors do not like to see power in the same hands. Now that Congress and the Senate are controlled by Republicans, the financial community is very comfortable with a Democrat in the White House.
As a result, the markets rallied when the election prediction models began to give Hillary a 90% chance of winning. Many in the markets were experiencing déjà vu. The markets behaved the same way before the Brexit vote. Then, even on election day, it seemed that the worst had been avoided. But it turned out not to be true. The behavior of the British pound in recent months clearly indicates how wrong the markets were. But the US situation is not entirely similar.
First, there is the question of momentum. It was not moving in the markets’ direction before the voting in Britain. And the number of supporters for Britain’s exit from the EU was increasing. This is not the case with the US elections. The drop in Hillary’s polls from last week has been reversed and she is moving up again. Second, the Brexit experience, which was unexpected and horrible, forced the political elites to treat Trump seriously and to do everything to avoid surprises. And they have succeeded.
As a result, if Hillary brings her campaign to its logical victory, the markets will rejoice. We might even see a Christmas rally. But in general, her victory is already priced in and means low volatility and investor calm.
Which, however is expensive. There is a lot of money in the world, and even if the Federal Reserve is likely to raise rates with a Clinton victory, this will not have a major impact on the situation. There is a lot of cash and it is flowing to the most remote corners of the world, such as Ukraine. We simply need to learn to accept it skillfully.
But if the markets are wrong and Trump wins tomorrow, a “black Wednesday” awaits us. The stock exchange prices will fall sharply, the dollar will peak, and gold prices will soar. And this is not because the markets fear Trump’s economic views. But because they fear his unpredictability.
Of course, the initial effect will be exaggerated. After all, US institutions significantly limit a president’s powers even if he appears to be as crazy as Trump. And later some of the losses can be recouped. But not immediately. And the emerging markets, including Ukraine, would suffer even more from a Trump victory. This increase in risk in the system always results in an outflow to reliable assets and means that the risky instruments are sold and investors flee to the US. However paradoxical this may appear, since the US would be the source of the risk.
In that case, we risk seeing more pressure on the hryvnia, though not critical, and a reduction in the economic growth forecasts for the country for the next couple of years. The same way that we risk seeing the realization of the historical Putin-Trump embrace, even though this risk should not be overestimated. Once people arrive in the White House, they become more reserved in their communications.
But in any case, there would be nothing good for Ukraine in this result in the US elections. Not economically and not politically. And it is fortunate that its likelihood is currently estimated at a modest 10% –15%.
Economist Serhiy Fursa is a fixed income specialist at Kyiv-based Dragon Capital. He was previously with Astrum Investment Management, Renaissance Capital, and BNP Paribas.