Its the biggest debate since  Mayweather/Pacquiao bout analysts at Goldman Sachs say. The analysts from the investment Bank are referring to tonight’s Presidential debate between Donald Trump and Hillary Clinton. The analysts note that “Monday, September 26 and viewership may approach Super Bowl proportions with an audience of perhaps 100 million.” That is pretty impressive considering the population of America is about 330 million or so – therefore besides for the economic ramifications we need to cover this event.

Hillary Clinton vs. Donald Trump
Image source: Wikimedia Commons

Full disclosure: Unlike many other media outlets which try to hide their bias I will admit mine. I never considered voting for Donald Trump ever since his vile comment about Mexicans when he announced his candidacy  – since then he has said too many whacky things to count. I was reluctantly considering Hillary Clinton as lessor of two evils even though I think her foreign policy has been a total train wreck, but after seeing my healthcare premiums soar for 2017 and realizing that under her plans she is literally trying to kill my children and add to her total of 50+ killed – JK – I am exaggerating obviously but without getting into ACA between that her, her lies, corruption and her non stop wars I cannot vote for her.

In a normal election campaign Gary Johnson not knowing Aleppo and not having an opinion on WWI or WWII (I can make arguments pro and con even for WWII and someone who is non interventionist should at least be able to make a coherent argument one way or the other) might be enough to disqualify him – but this is not a normal election – between crazy man Donald Trump and arch war monger and healthcare destroyer Clinton I see him as a protest vote of a small amount of sanity in an insane election cycle.

I  am not even a libertarian just the other two candidates are too nuts for me – anyway, my vote does not count because I live in New Jersey. With that said I am biased – I hate both candidates and do not really care who wins although for professional reasons like Scott Adams (before yesterday) I should say I want Hillary Clinton to win. So we will begin the coverage with that!

We have a brief preview on the economic front.

Hillary Clinton vs. Donald Trump – HSBC notes:

There are more undecided voters at this stage of the election campaign compared to the same point in the 2012 election contest. The first of three presidential debates kicks off on 26 September. Based on some patterns in previous elections, the debates could have an effect on polling results. That, in turn, could influence voter sentiment and so alter investor valuations of different assets for which prices might be affected by the outcome of the election. If nothing else, the debates have the potential to boost market volatility in the coming weeks.

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Hillary Clinton vs. Donald Trump – Morgan Stanley notes:

Given both candidates record-setting unpopularity, we simplify the math by assuming no coattails effect – in other words, we assume that Clinton winning and the Democrats taking the Senate (or House) are mostly independent events. However, it’s important to note that this approach to assigning probabilities is simplified, and we put it forward mainly for illustrative purposes. Such an approach ignores the possibility of some level of conditionality between the party of the White House winner and the odds of Senate control. Hence, the probabilities in the below exhibit could understate the odds of ‘Clinton Holds Serve’ and ‘Trump Turns Up the Base’. Yet, as we’ve previously noted  there’s no demonstrable proof of a coattails effect with unpopular candidates atop the ticket. Hence, the odds presented below are mainly for illustrative purposes and are in the spirit of ‘keeping it simple’ rather than making subjective adjustments.

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There is some disparity in performance when comparing “surprise elections” to all others going back to 1948. Of the five, three experienced negative one-month returns (5 of 12 nonsurprise elections experienced negative first-month returns), while three also experienced
negative one-year returns (4 of 12 non-surprise elections experienced negative one-year returns). We caution that we have only five data points, so it is hardly definitive, but we find it instructional nonetheless.

We would add that should the market have a reflexively negative reaction, we would trot out the advice that we have offered to investors for most of our career – get out your list of good businesses that are well managed and have a track record of compounding shareholder value over many years and start to add to them. Inevitably, the “ready, fire, aim” mentality of equity markets presents these buying opportunities from time to time and we believe that good businesses are good businesses regardless of the result of the U.S. election.

Hillary Clinton vs. Donald Trump – Barclays on the currency angle

The USD will likely trade sideways after losing some ground since the FOMC decision last week. Despite not hiking interest rates in its September meeting, the FOMC signalled its intentions to increase at least once before year-end. Therefore, market expectations for a
December hike barely changed and remain above 50%. We do think that markets will continue to price a higher probability as we approach year-end due to the fact that the status quo in terms of inflation and labour market dynamics should be sufficient to support an increase in fed funds rate before year-end.

More important will be the first (out of three) US presidential debates on Monday. As the race between Hillary Clinton and Donald Trump has tightened and we approach November 8, we expect a tighter correlation between the financial asset prices and the subjective assessment of the outcome of the elections (Figure 2). The higher percentage of undecided voters (around 20%) compared to four years ago (12%) increases the relevance of the debates as they could shift the odds in either direction.

High yield and high beta assets should perform well except for those tightly linked to the outcome of the US election as volatility has receded from its temporary spike. The Fed’s decision to remain on hold and BoJ’s guidance regarding monetary policy helped to calm down recent concerns about a drastic increase in yields in core markets.

Therefore, the resent sell-off in long-term bonds in core markets receded, helping to cap the recent increase in volatility. On the other hand, we would not expect to see a substantial decline in volatility in assets tightly linked to the US election outcome such as MXN, CAD and some Asian currencies.

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What do you think?

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