The 2016 presidential election and its likely impact on financial markets is proving incredibly difficult to call.
First we have the relative outperformance of the US economy versus many other major countries to consider. Regardless of who wins, it seems as good as inevitable that US interest rates will still be rising before the year is out.
Both candidates do have commitments that would increase the deficit, with proposed increases in public spending not being fully countered by corresponding tax hikes. But this certainly won’t alleviate concerns over inflationary pressures at the Fed.
The prospect of another rate hike brings its own implications for equity markets too and, in the medium term, is likely to lend further support to the US dollar. By many accounts, the most obvious instrument to look at for a clear reaction to the vote is going to be gold.
Higher interest rates may not be good for precious metals, but they are seen as a good store of value in times of uncertainty. A win for Donald Trump would surely bring a significant quantity of that into the equation and this is being played out already.
Over the summer as confidence grew that Hillary Clinton would be next in line to pick up the keys to the White House, gold prices fell, but with the reopening of that FBI investigation into her use of a private email server, sentiment shifted and we saw gold move higher once again.
A win for Trump would, by all accounts, serve to exaggerate this move as markets will be looking to brace for an unconventional bout of politics. Any asset that can hold value and still be immune to government influences is likely to prove popular.
A Trump presidency isn’t necessarily immediate bad news for the dollar or even for US equities, although it’s worth noting that both of these assets have seen prices inflated significantly over the last few months.
In other words, there’s certainly scope for a degree of profit taking and a Trump win could be just the catalyst we’re looking for here. In that case, the comparative safety of gold is likely to make it a winning proposition if global markets are once again destined for territory that sits well outside what could be considered the comfort zone.