This time is different in the US Presidential race

In September, markets obsessed about the US Federal Reserve – would they or won’t they raise interest rates. That didn’t happen, but what is certain is that the US will choose a new President next month. So far, this prospect has not overly pre-occupied markets. Either that is to come, or they believe that the choice of President does not matter that much because power lies with Congress and within that, a Republican party who were not that enthusiastic about their candidate. That same Congress still has power for discretionary spending and the budget ceiling. The President’s only true power lies with that of Commander in Chief, something which should only concern financial markets in extremis.

Given the extent to which this is a close race, then volatility during October seems very much assured. The direction the US takes in the coming four to eight years is going to be pivotal, both economically and politically. That matters for financial markets, because it will affect the extent to which the US grows, the extent to which it creates or reduces debt and how it interacts with the rest of the world. Depending on what measure one uses, China will also overtake the US as the world’s largest economy during the next four years (2018 according to the US Conference Board’s latest economic analysis).

Usually, the market impact of Presidential elections is marginal at best in the US, but there is a definite sense that this time is different. The areas of trade and immigration don’t require Congressional approval to renege on current commitments and these are key election battlegrounds for Trump. A Trump Presidency also has the potential to impact the standing of the US on the world stage, which could well have a longer-term impact on the economy via changing trading relations also investment in the US. Determining the impact of this on markets and the currency is challenging at best, but it’s fair to say that it could be long-lasting and would take time to become apparent.

It was already evident in the last Presidential debate, where we saw the volatility on the Mexican peso as Trump’s fortunes ebbed and flowed, although I would take that with a pinch of salt given the lack of liquidity there, especially during Asian. For now, a Trump with, with the Republicans’ retaining control of the Senate, would be modestly negative for stocks and also the dollar, more from the initial uncertainty created. It’s also in contrast to the likely lack of action that a Democratic win from Hilary would bring, especially if the Senate remains in Republican hands. It’s the difference between the unknown and the status quo. It reminds of one of my hated phrases – “markets don’t like uncertainty”. Markets exists solely because of uncertainty.