The Big Picture:
It seems that market does not learn from past mistakes. One day before the election and the FBI statement that clears H Clinton was the reason that the global equity market moved to 8 months high, only one day before the most important risk event of the year.
Overconfidence and euphoria are punished hard by the markets. At the moment there are some evil similarities with market conditions just like Brexit. Big bet companies give the same percentage of 90% probabilities for Clinton to be elected, exactly the same percentage that was given for a “Remain” vote for the Brexit.
As the volatility is expected to skyrocket, it is important to trade conservatively today and not rush into opening trading positions with the first breaking news.
Reasons that Clinton Can be elected:
Clinton is supported by the global corporate, financial and media system. She has strong allies, strong mechanisms and donations that will give her an edge.
Clinton seems more predictable than Trump for the majority of people. That gives her an advantage among the people who don’t like to take risks. Trump scares markets and many ordinary people, for families and middle class Americans who want certainty and are risk averse, Clinton seems more favorable.
According to many analysts, Trump was offensive for some large ethnic/religious minorities and females. These minorities represent a big part of the US society and most probably will vote against Trump.
Reasons that Trump can be elected:
Never before in the US history the candidate president (Hilary Clinton) run the pre-election campaign together with the retiring president (Barack Obama). This strategy shows some desperation from the democrats. Never before has US citizens has so high expectations from a president and the polls show that they are extremely disappointed with Obama. So it’s not certain that Obama added any specific value; probably the opposite.
Polls have a long history of failure to predict key events. Moreover, many supporters of D Trump do not want to admit publicly their desire to vote for him.
Trump’s supporters seems to have a unique unity they are much more enthusiastic than Clinton’s followers.
The major trend favor Trump. Black swan events have become a new normality. Anger and disappointment for the establishment make many people to support more political ‘’unconventional’’ views and movements (e.g Brexit).
Mexican peso is a very good indicator to measure market expectations. Mexican peso skyrocketed on the expectations of Trump defeat while plunge on expectations of Trump’s victory. Trading US election is important to understand that we should not focus on technical analysis that does not work in a flow driven week.
Hedge funds, institutions, investment banks and pension funds will rush to get positions according to the US election results.
A possible Clinton victory will drive to a huge appetite for risk. US Corporate debt, stock market and emerging markets will be the largest gainers. If we have to choose a forex pair that will gain the most it will be USD/JPY.
The euphoria after Clinton’s victory can fade quickly in the stock market and USD, as the US elections will leave a stamp of a future political uncertainty.
Unquestionably will be an Armageddon for markets at least for the first few days. We predict the largest drop in Global equity and corporate market while volatility (VIX) will fly. US banking shares will plunge more than 10%, while interest rate sensitive equities will have the largest drop as well.
As the USD drops it would trigger a Chinese Yuan to fall as well, which will force the riskier assets in a more aggressive sell off. From forex pairs we think that the USD/JPY will lose the most.
Which states to focus?
In order for Trump to be elected he needs to win key states; Florida, Michigan N Carolina, Virginia and Ohio which are the most important states for him. First we will get polls from Florida and half an hour later from N Carolina and Ohio. If Trump loses these states then most probably he will lose the presidential election.
If now Clinton loses Pennsylvania, N York, Illinois or Minnesota she will most likely lose the presidential election. In any case by 01:00 in the morning (UK time) we will have the first polls and a clearer picture to where the elections are headed. We suggest you to trade according to the winning / losing states and do not rush to open trading positions with the first news as trading algorithms will force you to leave with possibly huge losses.