Markets prepare for a vote that makes Brexit look basic
The choice of Hillary Clinton vs Donald Trump seems binary but the risks are complex
by: Gillian Tett
Two weeks ago Paddy Power, the Irish bookmaker, felt so confident that Hillary Clinton would win the US presidential election that it started paying punters who had bet on her victory.
So PaddyPower has done a volte-face and reopened its books. Right now, 2/1 odds are being offered on the Republican, and “91 per cent of bets on the US election [this week] have been on Trump”, the betting group says. As a spokesman observes: “I think the shock of Brexit is fresh in people’s minds.”
A similar about-turn is under way in the financial world. Until this week many asset managers were discounting a Trump victory. Even now groups such as Goldman Sachs continue to stress that this risk is low: the bank puts Mr Trump’s chances at about half that of Mrs Clinton. “The election is now seen to be roughly as uncertain as the average election since 1992,” according to Goldman’s Alec Phillips.
But that low risk is still too high for some investors. “A Trump presidency … could spark a sustained period of risk aversion,” says Mihir Kapadia, chief executive of Sun Global Investments, a London asset group.
Investors are scrambling to readjust their portfolios. Barclays, for example, estimates the S&P 500 index could rise or fall 1.5 per cent for every 10 percentage point swing in the polls. If the chance of Mr Trump winning hits 50-50 they expect the S&P to fall 4-5 per cent; a Trump victory could spark a fall of 11-13 per cent.
That is unnerving. The markets are also affected by the fact that the events of recent days mean that the outlook for Washington after November 8 is no longer binary. On the contrary, the risks that investors are being forced to price involve several highly complex moving parts.
Think about it. Back in June the EU referendum gave UK voters two options: In or Out.
Subsequently, it became clear that the Out choice threw up a range of scenarios, complicated further by the need for a UK parliamentary vote before Article 50 is triggered. Even so the vote was a “crossroads” — and could be modelled for investors as such.
In the US election, however, the potential scenarios look more like a “fan chart of probabilities”. Yes, the presidential choice seems binary: Mrs Clinton or Mr Trump. But, given the vagaries of the electoral college system, the outcome need not match the popular vote.
Meanwhile the rise of a third-party candidate, Evan McMullin in Utah, creates the (smallish) risk that neither Mr Trump nor Mrs Clinton will win a simple majority of electoral colleges.
In addition, the outcome of the races in the Senate and House of Representatives could alter the implications of the presidential vote. If Mrs Clinton gains control of both, for example, her policies might be dragged leftwards to appease figures such as Senator Elizabeth Warren.
Conversely, if control of the House and Senate is split, that could deliver more gridlock — unless Mrs Clinton is able to forge a new bipartisan spirit.
There is yet another issue complicating these risk models: legal threats. If Mr Trump wins, he faces a court case over his “university”. This, in itself, is bizarre. But the danger hanging over Mrs Clinton is even more peculiar — and alarming.
It looks likely that the reopened FBI probe will last weeks, if not months. At best, that could distract and disrupt the next administration. At worst, it could unleash a full-blown constitutional crisis, akin to the Nixon scandals of 40 years ago.
“The decline is not just because the stock market is nervous about Donald Trump,” says Capital Economics. “It also reflects the reality that even if Clinton now wins, her authority and mandate will be damaged.”
So — while the shock result of Brexit might be haunting everyone’s minds — the dirty truth of markets today is that the risks thrown up by Brexit look almost simple compared with those of the US election.
That is particularly true in a world where most investors are ill-placed to price scenarios that come in multiple shades of grey — and where no one can create an algorithm to model the antics of the FBI.
Brace yourself for further market turbulence.