What Wall Street's Watching In Tonight's Debate

September 26, 2016 08:22 AM

An already heated U.S. presidential campaign is poised for hostilities at Hofstra University on Monday night, with Republican nominee Donald Trump and Democratic nominee Hillary Clinton set square off on the same stage for the first time.

With a large swath of undecided voters still up for grabs, this head-to-head contest could tip the scales towards one candidate or the other — and as such, has investment implications that Wall Street can't afford to ignore.

As polls have narrowed in recent weeks, strategists have commented that a variety of assets — U.S. Treasuries, the Canadian dollar, and of course, the Mexican peso — seem to be closely linked to Donald Trump's chances of emerging victorious in November, and have also recommended a variety of trades tied to the real estate mogul's prospects.

Analysts generally anticipate continued gridlock in Congress if Clinton ascends to the presidency, which suggests monetary policy will continue serving as the key source of support for the U.S. economy.

While strategists expect U.S. growth to pick up in the aftermath of the election as uncertainty dissipates, sector-specific risks and the magnitude of the potential threat to the bond market vary greatly.

Here's what Wall Street is saying about the Clinton-Trump showdown, which Goldman Sachs Group Chief U.S. Equity Strategist David Kostin has dubbed "the biggest match-up since the Mayweather/Pacquiao bout."

Athanasios Vamvakidis, head of G10 FX strategy at Bank of America Merrill Lynch:

"Having been in the driver’s seat for most of the year, central banks can now take a break and wait for the U.S. elections. We have been arguing that markets are underpricing the risks involved. As the polls now suggest a much narrower gap between the two candidates, we feel even stronger about our concerns...We see several clear fault lines where the outcome of the U.S. elections will likely matter for EM FX, namely: U.S. fiscal policy, trade policy and associated concerns over rising protectionism, U.S. corporate tax policy and repatriation of overseas earnings and finally geopolitics."

Andres Jaime Martinez, FX and rates strategist at Barclays Capital Inc.:

"The single most important event in the U.S. will be the first presidential debate between Hillary Clinton and Donald Trump which is set to take place from 9pm to 10:30pm ET. It takes particular relevance as the share of undecided voters is somewhat higher compared to four years ago. Since the presidential race has been tightening, it seems that swing states will have increasing relevance as well as undecided voters in shaping the outcome.

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. The higher percentage of undecided voters (around 20 percent) compared to four years ago (12 percent) 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 U.S. election as volatility has receded from its temporary spike."

David Kostin, chief U.S. equity strategist at Goldman Sachs Group Inc.:

"The first U.S. Presidential debate will take place on Monday, September 26 and viewership may approach Super Bowl proportions with an audience of perhaps 100 million...Regardless of victor, the most likely policy outcome of the election is increased fiscal spending. We recommend clients vote with their wallets and focus on the likely beneficiaries.

Health Care appears to be the sector most at risk from the election. Sec. Clinton’s criticism of drug pricing and Mr. Trump’s opposition to the Affordable Care Act have drawn investor focus to the sector as the election approaches. Health care providers are among the few industries that have demonstrated a statistical relationship with election odds in recent months."

Johanna Chua, chief Asia Pacific economist at Citigroup Inc.:

"Investors will be anxiously watching for the impact of this debate on support of Hillary Clinton and Donald Trump. Democrats’ nominee Clinton’s lead over Republican nominee Trump has narrowed sharply in various opinion polls over last few weeks. Investors fret over a market unfriendly outcome from the U.S .Presidential elections. This may drive the demand for portfolio hedges in the run up to November 8 elections. Investor appetite for assets exposed to U.S. political risks may be weak. It is because of this that volatility may rise and EM FX may not strengthen even though FOMC was dovish last week."

Priya Misra, head of global interest rates strategy at TD Securities:

"Going into the election there are already some indications that increased uncertainty may be hurting U.S. growth. This should intensify in the weeks ahead, with the focus falling on the Presidential debates and the subsequent performance of state polls. Once the election is over, relief could result in a modest rise in yields as markets price out some economic uncertainty, with the move likely to be front end driven."

Michael Zezas, chief municipal strategist at Morgan Stanley:

"Most markets appear to be treating Trump policies as a tail risk, or at least are unsure how to interpret the impact of Trump's potential policies. If his recent gains in polls hold, or improve, markets may start to anticipate the impact of his potential early policy priorities...Though plausible that a Trump administration could get little done in its early days, he will also have the motive and opportunity to act on tax and trade reform, which offer the political and legal paths of least resistance. Hence, markets may begin to consider their possible ramifications. It's difficult to know the net effect of these proposals without knowing specifics of how and in what combination they would be enacted in practice."

Kit Juckes, global strategist at Societe Generale SA:

"If the main drivers of the start of the week are going to be Trump/Clinton and the OPEC meeting, that brings the recent highs in USD/CAD back into focus. Yield differentials have been edging higher and threaten to drag USD/CAD through 1.3250, the main psychological barrier to a bigger move."

Martin Enlund, chief currency strategist at Nordea Markets:

"Most market participants are however greatly concerned that the U.S. could see a Republican in the White House. It is generally perceived that a Donald Trump presidency would be consistent with greater global economic-political uncertainty (troublesome for investment activity and manufacturing growth), and that Trump poses a risk to world trade, and so on.

As a consequence, similar to the wide-spread Brexit fears this summer, it might make sense for various accounts to not sell EUR/SEK if they fear that a Trump presidency could impact upon the global economy negatively."

To contact the authors of this story: Luke Kawa in New York at lkawa@bloomberg.net, Julie Verhage in New York at jverhage2@bloomberg.net, Sid Verma in London at sverma100@bloomberg.net.

To contact the editor responsible for this story: Joe Weisenthal at jweisenthal@bloomberg.net, Tracy Alloway

©2016 Bloomberg L.P.

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