BY Jameel Ahmad
Investors have suddenly shifted to a “risk off” mode as a result of the recent shift in momentum towards Donald Trump being declared as the possible winner of the US Election in a couple of days’ time.
The markets are only just beginning to price in any risk premium with this contributing towards a significant reduction of risk appetite in the markets, essentially driving demand for safe-haven assets such as Gold and the Japanese Yen.
It has to be made picture clear that the reasonable chance of Donald Trump winning the US Election has still not been priced into the markets, meaning the likelihood of further woes for the equity markets and increased demand for the likes of Gold and the Japanese Yen.
The latter move for the Yen represents yet another headache for the Bank of Japan (BoJ) and the central bank will be in complete shock if Trump wins, because it is going to drive Yen demand through the roof and eliminate any of the faint remaining optimism that the Yen can resume its weakness as the BoJ heavily desire.
We could be just a matter of days away from a Trump victory turning the global market outlook upside down in what would have to be remembered in history as the most shocking political moment of the modern era.
Basically 2016 has been a crazy year with the UK voting to leave the European Union resulting in the global world reacting in shock and the reaction to Donald Trump becoming the President of the United States would at the very least mirror such surprise.
We have also witnessed the unexpected renaissance of popularity for Pokémon providing another more light-hearted moment to remember the year,so let’s not rule out the possibility of any further surprises for 2016 away from the table.
It’s time to face the music and accept the reasonable, but increasing chance that Donald Trump will win the US election and could well become the most powerful man on the planet in less than one week.
The financial markets have yet to price in such an event and the problem is that investors have only just started to price in any risk premium.
Recent history is repeating itself once again because this is the exact same story as what happened prior to the EU referendum vote, however the reaction from the financial markets on this occasion should in theory be even more severe and investors will be encouraged to continue covering their bases beforehand to mitigate such risks.
Who would be the winners and losers of the financial markets if Trump shocks?
Winners:
Gold – The natural safe-haven appeal should drive demand from investors due to both shock and possible uncertainty ahead through the roof.
Yen – This would represent another nightmare scenario for the Bank of Japan (BoJ) and is completely the opposite to what the central bank desire, however there is no doubting the undeniable fact that in times of uncertainty the Japanese Yen suddenly finds itself as a trader’s best friend.
British Pound? –This one is a little whacky and far less probable thanincreased demand for Gold and the Yen, although it would not be unusual or surprise me if the weakest currency of 2016 finds itself regaining some losses as a result of spectacular drops in Dollar demand.
Losers:
Stock markets – There is a chance that investors will go into a “risk-off” mode for a prolonged period if Donald Trump shocks the world next week. This means a significant reduction in risk appetite diminishing investor attraction for riskier assets and the stock markets are considered as one of these. Although this will not be mentioned right away, Donald Trump has an obvious bias for higher US interest rates and this is why so many analysts are negative on stocks if Donald Trump wins.
Peso – It doesn’t need to be elaborated on much more than the pure fact that Donald Trump is clearly anti-Mexico. Trump winning is seen as a negative for the Mexican economy, and the Peso will react in the same ways it has done since the beginning rounds of the US Presidential Election debates.
Oil? – This hasn’t been touched upon very much, but Donald Trump winning the Election could have negative consequences on the price of oil. Forget about the ongoing will they/wont’ they cut production saga from the OPEC Committee. Donald Trump becoming the President of the United States could result in growth forecasts being downgraded at least in the short term due to investor uncertainty, which will in theory weaken demand for commodities like oil and weigh on the valuation of oil.
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