Do not extrapolate from pre-to post- election - DB flash

Deutsche Bank Markets Research team believes the post election response in the markets is likely to be different especially for risk assets than the one seen before elections. Here is the rationale for the argument.

Key points

The pre-election market response is in no small part a desire to reduce VaR and batten down the hatches until the direction of the political storm path is better understood.

While a Clinton victory might initially be greeted with a risk relief rally on the prospect of policy continuity and predictability, we would also expect that her capital gains tax plans will have a negative/dampening impact on some key risk bellwether assets like equities into the turn of the year. More specifically, Clinton has proposed a sliding scale for realized capital gains depending on the years an asset is held, starting at ordinary income marginal tax rates for assets held less than 2 years and sliding to 20% for assets held for 6 years or more.

If Trump wins, a large fiscal stimulus would then almost certainly be in the offing, probably inclusive of a transformational shift in corporate tax structures. This could have very favorable implications for FDI, the US narrow basic balance and the USD. The market will rightly have some serious concerns about long-term fiscal sustainability and the longevity of stronger growth. However, in the initial instance there could also be some similarities with the early stages of the Reagan 1983-84 boom, before the subsequent slowdown.