The impact of the US presidential election on the market (Part 2)

The impact of the US presidential election on the market (Part 2)

Last time we talked about how the Japanese stock and real estate market would be affected if Hillary Clinton were to be elected in the upcoming presidential election in November. This time we will be talking about the current domestic tone regarding the influence of a Trump presidency.

With regards to a victory for Hillary, we wrote that "the market would generally greet it with a sense of security", but perhaps the opposite could be said of Trump. Trump has made an abundance of what could lightly be described as inflammatory statements regarding issues such as women's rights, racial discrimination, extreme criticism of other countries, and so on. If such statements remain the norm after he were to become president, this would doubtlessly create turmoil in the world markets.

As the presidential election approaches, he has withdrawn some of these statements, and appears to be keeping a lid on further controversial ones. That being said, Trump's position of protectionism and his commonly known policies would certainly cause market disturbances.

Among the policies Trump has listed, the ones that seem most likely to have a big influence on the currency market are "continuation of low interest rate policies", "expansion of infrastructure investment", "significant reduction of corporation tax".

Trump has stated regarding monetary policy, and particularly of Chair of the Board of Governors of the Federal Reserve System Mrs Janet Yellen, "The FRB is dominated by the current regime". After becoming president, he has expressed that he would give strong warning about the FRB's raises in interest rates, and is thinking to continue low interest rates.

As a background to this, depending on rises in interest rates, with following infrastructure investment increases etc. also possibly rising, the thinking could be that the payment burden of government debts will reduce. Indeed, while he is unlikely to being able to quickly dismiss the chairwoman directly after being elected, there is certainly the possibility that their operation of monetary policy may not go smoothly depending on Trump's interference. For the time being, if there is no rate hike then the dollar-yen exchange rate is likely to stay inclined towards a low dollar high yen situation.

Further, trump has proposed a repeat of national defense spending limits, and to strengthen the defense budget. Added to the increased spending on infrastructure, military expansion will increase government debt and contribute to a weakening of the dollar.

On the other hand, if Trump performs his "unprecedented" change in corporation tax from 35% to 15%, a reflux of funds into the US does seem inevitable. In 2004 in the US, the "Homeland Investment Act" policy to reduce tax burden on American multinational companies when they sent surplus funds to America was established. Due to this, 2005 saw a 500 billion dollar reflux of funds into the US, leading to a substantially higher dollar economy. Large scale corporate tax decreases would lead to large scale dollar buying (also estimated to be over 400 billion USD by some foreign security companies) and would likely be a major factor in a high dollar low yen situation.

Further, Trump completely rejects the TPP (Hillary has also strengthened her stance against the TPP, but not to the same degree as Trump). We will omit the pros and cons of the TPP, but the view that Trump's extreme protectionism would limit US economic growth, and significantly lower US GDP in the long term certainly exists. It goes without saying that the decline of the US economy that lies at the heart of the world economy would have a huge effect on Japan or asian economies' stock and exchange markets. So how will stock prices and dollar exchange rates move? The problem is that currently there is no clear vision of a "Trump victory". For the market, the tale risk of a Trump win, is currently at a point of “while extremely unlikely to occur, the potential damage would be massive".

If Trump really were to win, the market would move to a position of panic. Specifically, an uncertain future would lead to a strengthening of the risk off trend, with "emergency yen buying" and "Risk assets such as stock and real-estate selling" likely to occur. While this "Trump shock" may not be as large as the Lehman shock, it may be bigger than the Brexit Shock from which the market quickly recovered.

However, the market will closely examine Trump policies after this temporary yet sharp drop in the market. At the moment, the likely occurrence of a "twisted" senate due to a republican lower house and a democratic upper house outcome of the senate elections would probably cause far more difficulty for the inexperienced Trump than for Hillary.

While it may be the case that we see a more gentlemanly Trump, there could be a 20% drop in corporate tax, and depending on the economic situation there may be a necessary interest rate hike. For investors, there would need to be a case by case revision of their investment scenarios. For them there would be an increased amount of effort needed, but also a possible increase in chances for investment. Either way, one month remains. This election is certainly one to keep an eye on.