3rd November 2016
How would a Trump victory affect US equities?
•
What is the outlook for euro-zone peripheral government bonds? (see Chart of the Day)
•
Further monetary easing in the UK seems unlikely (12.00 GMT)
•
US ISM non-manufacturing index probably eased back in October (14.00 GMT)
Key Market Themes
The consensus is that a victory for Donald Trump in next
week’s presidential election would deal a lasting blow to
the US stock market. Our sense, though, is that the
performance of the S&P 500 would be a bit like that of
the FTSE 100 in the wake of the vote for Brexit – after a
lurch to the downside, a weaker currency and a lack of
radical policy changes in practice would fuel a recovery.
(See our Global Markets Update, “Would a Trump win
really be bad for the S&P 500?”, published on Monday.)
Admittedly, the S&P 500 has come under some pressure
since it was revealed on Friday that the FBI is investigating
more emails as part of its probe into Hillary Clinton’s use
of a private server, which has boosted her rival’s standing
in the polls. (At around 2,100, it is now at its lowest since
early July.) And we think the index would take a much
bigger knock if Trump actually won the race to the White
House, which now seems quite possible. But there are
two key reasons to think that the sell-off would not last
long and that it could ultimately be more than reversed.
First, the US dollar would probably fall. After all, US
monetary policy would be expected by many to remain
looser for longer. And the election result would probably
see money temporarily flow into traditional “safe haven”
developed market currencies, like the Japanese yen and
the Swiss franc. A weaker dollar would be a boon to the
multinational companies that dominate the S&P 500 and
could offset concerns about a protectionist backlash
stemming from Trump’s proposals on trade.
Second, a Trump victory might not result in the radical
changes that many fear. He would probably soften his
rhetoric on trade policy once in the Oval Office and
would struggle to push his plans for fiscal policy through
Congress (although these are actually more stock marketfriendly than those of his rival). And while the President
has a freer hand on foreign policy, even the geopolitical
consequences of a Trump victory might not be universally
negative. (See our Global Economics Update, “What
would be the global fallout from a Trump victory?”, also
published on Wednesday.)
Admittedly, if the election is extremely close and the
result ends up being challenged, lingering uncertainty
could continue to weigh on the stock market, as we saw
in 2000. (See our US Economics Update, “Disputed
election result would introduce new uncertainty”, also
published on Wednesday.) But otherwise the checks and
balances of the US political system are such that elections
have often had little bearing on the performance of the
stock market. The state of the economy has mattered
more. Indeed, the poor performance of the index in late
2000 and in the years that followed largely reflected the
fallout from the bursting of the dot com bubble, which
was followed by a mild recession.
The upshot is that while we would expect the S&P 500 to
break below 2,000 in the event of a Trump victory, we
wouldn’t feel compelled to cut our current end-2017
forecast of 2,300. (John Higgins)
What to watch for today: US
Markets will be digesting Wednesday’s FOMC policy
announcement (18.00 GMT, after the publication of this
Capital Daily). While we think that the Fed will leave rates
unchanged at this meeting and instead raise them in the
mid-December meeting, we wouldn’t rule out the
possibility of a surprise November hike. (Paul Ashworth)
SELECTED DATA AND EVENTS
nd
2 Nov
US Fed Policy Announcement
3rd Nov
Aus Trade Balance (Sep)
(sa)
GMT
Previous*
Median*
CE Forecasts*
18.00
0.25%-0.50%
0.25%-0.50%
0.25%-0.50%
00.30
-$2.0bn
-$1.7bn
-$1.5bn
UK Markit/CIPS Services PMI (Oct)
09.30
52.6
52.4
52.8
EZ Unemployment (Sep)
10.00
10.1%
10.1%
10.0%
UK BoE Rate Announcement
12.00
0.25%
0.25%
0.25%
Cze Interest Rate Announcement
12.00
0.05%
0.05%
0.05%
14.00
57.1
56.0
55.0
US ISM Non-Manufacturing Index (Oct)
*m/m(y/y) unless otherwise stated; p = provisional
Capital Daily 1
Chart of the Day
Euro-zone government bond yields have been on the rise
recently. (See Chart.) This can partly be explained by
higher inflation expectations. But it also reflects the
perception that ECB policy may not be loosened by as
much as investors had previously anticipated. If this turns
out to be true, then it would be unwelcome news for the
euro-zone periphery, whose governments rely on very
loose policy to accommodate their fragile fiscal positions.
CHART: EURO-ZONE 10Y GOVERNMENT BOND YIELDS (%)
4.5
4.0
3.5
Germany
Portugal
Spain
Italy
4.5
4.0
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
Jan-15 Apr-15
-0.5
Jul-15
Oct-15 Jan-16 Apr-16
Jul-16
Oct-16
Source – Thomson Reuters
As it happens, we don’t think that the ECB will scale back
its stimulus in the near term. Indeed, we expect the Bank
to extend its Asset Purchase Programme beyond March
2017 and to shave another 10bp off its deposit rate to
-0.5% next year. This should prevent much of a rise in the
“risk-free” component of peripheral sovereign yields.
Nonetheless, country-specific risk factors are likely to put
further upward pressure on peripheral yields. In Spain,
Prime Minister Mariano Rajoy was finally able to form a
government last weekend after months of political
stalemate. But as a minority administration it will struggle
to meet the country’s fiscal targets, and another snap
election is certainly on the cards. Meanwhile, with poorer
economic growth prospects, Portugal’s success in
holding onto its investment-grade sovereign credit rating
from DBRS last month by no means marks the end of the
uncertainty surrounding its eligibility for ECB policy
support. And Greece will continue to dance in and out of
the markets’ spotlight to the tune of its debt repayment
and bailout schedule. (See our European Economics
Weekly, dated 31st October, for more.)
Finally, on top of the country’s banking sector woes, there
is political risk in Italy associated with the referendum on
constitutional reform which will be held in December. If
rejected, and Prime Minister Renzi subsequently follows
through on his previous pledge to resign, a destabilising
period of political uncertainty would emerge, from which
the anti-euro Five Star Movement would benefit at the
ballot box. (Simon MacAdam)
We expect to learn that the ISM non-manufacturing
index (14.00 GMT) eased back to around 55.0 in
October, from 57.1, as weaker retail spending restrained
service sector activity. (Andrew Hunter)
Canada
No major data or events scheduled today.
Continental Europe
National data point to a small fall in euro-zone
unemployment in September (10.00 GMT), but the
region’s labour market recovery remains fragile. We have
pencilled in a fall of about 80,000, which would bring
the headline rate down from 10.1% to 10.0%. However,
recent survey data suggest that the pace of employment
growth is set to slow. (Daniel Christen)
UK
October’s Markit/CIPS services PMI (09.30 GMT) will
probably point to slower service sector growth at the start
of Q4, after Q3’s strong quarterly rise of 0.7%. That said,
the forward-looking balances of September’s survey
suggest that the business activity index could strengthen
in October. As such we have pencilled in a slight rise
from 52.6 in September to 52.8. Nonetheless, this would
still be consistent, on the basis of past form, with a
slowdown in quarterly services sector growth, from 0.7%
in Q3 to 0.3% or so. (Ruth Gregory)
The resilience of the economy in Q3, combined with a
stronger inflation outlook, will probably be enough to
persuade a majority of MPC members to leave interest
rates unchanged at today’s meeting (12.00 GMT). What’s
more, while we would not rule out the possibility of
another rate cut entirely, we think that growth will
continue to surprise the MPC on the upside over the
coming quarters and that the cushion from the lower
exchange rate and easing of the fiscal squeeze should
mean that further monetary policy easing is no longer
warranted. (Paul Hollingsworth)
Japan
No major data or events scheduled today.
Wednesday’s fall in the consumer confidence index from
43.0 in September to 42.3 in October, was broadly in line
with expectations, with all four sub-indices weakening
last month. Nonetheless, sentiment remains at high levels
by recent standards. Meanwhile, household inflation
expectations showed further signs of having bottoming
out. Our calculation of the weighted average change in
consumer prices expected by households over the
coming year held steady at 1.8% and has thus been little
changed for five straight months. (Marcel Thieliant)
Australia & New Zealand
Australia’s nominal trade deficit (00.30 GMT) probably
narrowed sharply in September. We estimate that the
total deficit fell to an 18-month low of $1.5bn. If higher
coal prices are sustained, the deficit could even be wiped
Capital Daily 2
out completely next year. But after stripping out price
effects, it looks as though net exports subtracted about
0.5ppts from GDP growth in Q3. (Paul Dales)
While the +1.4%q/q rise in employment in New Zealand
in the third quarter was stronger than expected, wage
growth remained worryingly weak, with average hourly
earnings growth slowing from 2.1% to 1.6%. (Data
released on Tuesday). This will do little to allay the
RBNZ’s concerns about the inflation outlook and as a
consequence does not change our view that the RBNZ
will cut its policy rate to 1.75% at next Thursday’s policy
meeting. (Kate Hickie)
China
No major data or events scheduled today.
India
No major data or events scheduled today.
Other Emerging Markets
The Czech National Bank will probably keep its policy
rate (12.00 GMT) unchanged at 0.05% and retain its
exchange rate ceiling at Kč27/€ on Thursday. The
accompanying statement is likely to reinforce our view
that the MPC will lift the ceiling in mid-2017. (Liam
Carson)
Simon MacAdam (+44 (0)20 7808 4983)
[email protected]
Published at 16.08 GMT 2nd November 2016.
Editor: John Higgins
Capital Economics
Executive Chairman: Roger Bootle
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Capital Daily 3