US: Democrats trumped by another voter protest? - SocGen

Kit Juckes, Research Analyst at Societe Generale, notes that the Donald Trump is winning electoral college votes in key marginal states (Florida, Ohio, North Carolina) and while there is still a steep climb ahead for him to win the Presidency, he’s doing a good impression of a cyclist overtaking all his opponents on an alpine stage of the Tour de France.

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“Will he get the polka dot jersey and paint the electoral map red? Markets think so and are responding with the simplest ‘risk off’ reaction imaginable. Gold and the yen are up. Treasury yields, equities, the Canadian dollar and Mexican peso are down. The Mexican peso has maintained its status as the bellwether of sentiment and is moving particularly sharply.

In FX, the biggest mover and a ‘buy’ is USD/MXN but that’s moving incredibly fast. We also like long USD positions in EM against the Korean won and the Taiwanese dollar, while in G10FX, losers include the AUD and CAD, but we’ll see further gains for the Yen and bigger moves for EUR/USD (up) and USD/CHF (down).

Away from the FX markets, the risk-off move would see US credit spreads move sharply wider (outright and for that matter relative to equities). In Rates, a bull steepener in Treasuries is likely as the market re-thinks the December rate hike and probably, wider peripheral spreads in Europe as eyes turn rapidly to the Italian referendum. If protest votes are ‘a thing’ then the next opportunity for the electorate to express how fed up they are with conventional politics, are Italians.

Away from the initial reaction to Trump winning (if that eventually materialises) the fact that the Republicans appear set to control both houses in Congress will help get conservative policies through. Not good for international trade, but potentially pointing towards lower tax rates and possibly, an easier overall fiscal stance if it’s hard to get spending cuts through as an offset.

More than an FX issue, that throws out questions about the bull steepening in Treasuries. A Trump Presidency s not obviously supportive for the Treasury market in anything other than a first reaction. That matters to FX markets because the first reaction is a combination of lower yields in the US and risk aversion globally. If we get higher US yields in due course, that will limit downside in USD.JPY (I still doubt we’ll see a sustained break below 100), but it increases downside risks for AUD. NZD and CAD, all very sensitive to US yields. Likewise, risk off and higher Treasury yields will depress my colleague Jason Daw even more – there’s not a lot of comfort there for EMFX in general.”