Market Reaction To The Election

Traders have been experiencing the swings of volatility in the markets recently. Every new piece of information released about one of the US Presidential candidates seems to cause the market to fluctuate. People are anxiously waiting to see what will happen the day after the election.

Bloomberg strategists came up with some predictions as to what might happen to certain markets should Trump or Clinton be elected. They also added the scenario of having Democrats regain control of both the Senate and the House. They assumed that should Donald Trump be elected, both the House and the Senate would remain in the control of the Republicans.

The strategists use the term “flight to safety.” This is a “sudden increase in appetite for safe assets relative to risky assets. Typically, it is a combination of a preference for safe assets (low volatility, downside risk), high quality assets (low default) and highly liquid assets.” (Flights-to-Safety, NBB Conference on "Endogenous Risks" -October 2012)

Bloomberg says that if Trump is elected, the US Treasuries, “Initial flight to safety would drive prices up, yields down.” There may then be tax cuts and spending, which may later shift money to equities. This could push bond prices down and yields up. If other countries decide to unload Treasury holdings because of any isolationism, this could be even more so.

It looks as if Bloomberg sees the opposite happening if Clinton is elected. They predict there would be risk-on that would drive prices down and yields up, especially in the initial relief rally. This would only be for the short-term, as they predict that for the longer term, there would not be much impact. The Democrats in control would have prospects for more spending driving prices down and yields up.

An Emerging Market is a nation that is not as advanced as developed countries but more advanced than frontier market countries. They typically have a physically financial infrastructure, including banks, a stock exchange and a unified currency.

For the Emerging Markets, things would be negative under President Trump, except for Russia, due to skepticism on trade deals. Mexico, Southeast Asia and China may be most vulnerable. India and Indonesia would be less vulnerable, due to their robust economies.

Under President Clinton, the Emerging Markets would find things very positive due to an increased appetite for riskier investments with bigger potential payoffs. This would be the same if the Democrats take control of both Houses of Congress.

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