US markets possible reaction to a Trump victory – Rabobank

Philip Marey, Senior US Strategist at Rabobank, suggests that in case of a Trump victory, we may see an initial bout of risk aversion as markets consider political uncertainty to be higher for this outcome.

Key Quotes

“However, he will not take office until January 20, 2017, so markets are likely to stabilize well before the end of the year. (Of course, things could become more complicated if the election results are delayed or challenged in court.)

Nevertheless, the possibility of a trade war in 2017 will reduce expectations about US GDP growth and the Fed’s hiking path. This should continue to depress US treasury yields. In fact, if Trump becomes President, his trade policies are likely to have a bigger market impact than his fiscal policies. If he decides to launch protectionist measures against China and Mexico, Inauguration Day could be the start of risk-off episodes in markets caused by trade conflicts. The markets will shift to a risk-on mode if the trade war game ends in a Reagan- or Bush-scenario. However, there is a high risk of recession if the game ends in a trade war, depressing stock prices and treasury yields for a sustained period. In this case, the fiscal stimulus could soften the recession somewhat.

If a full scale trade war is averted, the fiscal impulse could boost the economic recovery that has been disappointing so far. However, if the Republicans are not in control of both the Senate and the House of Representatives (which means Divided Government), the fiscal impulse will be modest and budget deadlines may give rise to episodes of risk aversion.”