When the US Federal Bureau of Investigation gave a clean bill of health to Hillary Clinton’s latest batch of troublesome emails on Monday, the financial markets responded euphorically.
In Australia the share market jumped 1.3 per cent, while the Australian currency gave up some ground, falling from over US77.13c to US76.73c. The Mexican peso jumped 1.8 per cent against the greenback, a very big move in a few minute’s trading.
These reactions amount to collective sighs of relief by global investors who took some heart that Donald Trump’s bid for the US presidency had just become less likely to succeed.
Over the past two weeks, as the Trump presidential bid moved from a long shot in the polls to something much more possible, the markets started to panic.
What Trump policies could mean
Markets, or more correctly, the rich people and fund managers who dominate them, are scared of what the results of Donald Trump’s policies might mean.
“With Trump there would be a market reaction if he were to win,” said independent economist Stephen Koukoulas. “But the real issue is what would happen in six or 12 months time.”
“If he increases tariffs and restricts trade with China and Mexico, the effects could be very disruptive for markets. There are other questions like ‘how can he cut taxes and reduce the deficit at the same time,” Mr Koukoulas told The New Daily.
“With Clinton it would be more of the same. There’s not much of a question over what she is likely to do.”
Big hitters out there in the investment world have been fretting publicly.
“If Donald Trump were to win, that outcome would have been unexpected and thereby may cause a jump in the equity risk premium with negative price-equity multiple repercussions,” investment group Citi commented in a research note reported by The Australian.
“We think a Trump victory could spark a three to five per cent setback in the S&P500, as people pause to assess the impact.”
Credit Suisse, another investment bank, has said the effect of implementing Trump policies could result in a 10 to 15 per cent fall in the US stock market.
Other vulnerabilities a Trump victories could expose include the US reliance on Chinese capital to fund its debt and deficits.
“China hold about $1 trillion in US bonds,” says Mr Koukoulas. “Trump has been critical of China’s trade policies and talked about ‘currency manipulation.
“That could trigger capital flight, and a selloff in equity markets,” says Alex Joiner, chief economist with IFM Investors.
If Chinese investors lose faith in the US and start to sell US bonds, that would put the skids under the US dollar and push interest rates up as Washington tried to attract other investors to fund its spending.
Two indicators on Monday show that the FBI’s ok to Clinton’s emails are easing fears over capital flight.
The US dollar was stronger
The Australian dollar opened around a three week high against the greenback of US77.13¢ on Monday. But it quickly fell back below the US77¢ level to trade at US76.73¢.
The greenback also rose against a basket of European currencies, up half of one per cent since Friday. Those movements show investor negativity about the US is waning as Clinton stocks rise.
The strength in the Mexican peso, despite the greenback’s rise, means currency speculators think the Trump suite of anti-Mexican immigration and economic policies is far less likely to be implemented.
Gold lost a little lustre
When the Clinton news emerged the gold price dropped 1.2 per cent to $US1290.37 an ounce. Last week, as the Clinton email scandal re-emerged, gold jumped 2.2 per cent.
Because gold is considered a safe haven when all else goes to custard, Monday’s fall shows investors became less worried. Citi had predicted that a Trump presidency would see gold over $US1400.
Westpac is cautious
While a Trump-inspired shakeout seems now less likely, the corporate world hasn’t written it off. Westpac CEO Brian Hartzer told journalists on Monday the bank is prepared in the event of a Trump victory.
“We always think about the likely outcomes in financial markets and what sort of positioning we want to have and we expect there’ll probably be a fair amount of volatility in the markets, whatever happens, over the next little while and so we’ve got a pretty conservative position at the moment,” he said.
Westpac earlier warned a Trump victory “would have larger long-term global ramifications than Brexit.”