Will a Clinton debate win spur the dollar and stocks

The final US Presidential debate takes place tonight at 0200 BST in Las Vegas. It’s a high stakes game, as this could be the biggest chance both candidates have to secure much-needed votes ahead of the November 8^th election. If you believe the polls, then it could be Hillary Clinton’s election to lose. According to the latest Bloomberg poll, Clinton leads Trump by 47% to 38%.

Clinton has managed to capitalise on the recent scandals afflicting the Trump campaign, and may have created a potentially insurmountable lead over her rival with only 3 weeks to go. Could another sub-par performance from Trump this evening secure her victory before the polling booths are even open?

It ain’t over till it’s over…

Lenny Kravitz may not have been talking about the US Presidential debate, but Clinton still has to win over some important swing states. Each candidate needs 270 Electoral College votes to win the Presidency. So far Clinton has 256 and Trump a mere 181. This means that 101 are still to play for. Although the future looks bright for Hillary Clinton, she still needs to win over some powerful swing states, including Ohio, North Carolina, Florida and Iowa. Considering Trump seemingly came out of nowhere to win the Republican Primary, there is still a chance he could steal the rug from under Clinton’s feet until she has secured the 270 necessary votes to officially step foot into the White House as President.

So where could this leave the markets?

We have stated in previous notes that as the US election gets closer it appears to have triggered some nervousness in financial markets. The dollar has backed away from recent highs, and USDMXN, which has been a proxy for election risk in the FX market, has stabilised after falling sharply as Trump’s campaign took a turn for the worse. The S&P 500 has also come under some pressure, and fallen through its 50-day sma. It is currently hovering around its 100-day sma, a key technical level of support, at 2141.

If Clinton can win tonight’s debate then we may see the dollar may resume its rally as the market assumes that Clinton will have a better chance at winning the 14 extra electoral college votes from the swing states that she desperately needs.

Is a win for Clinton and the Democrats good for the markets?

The impact on the S&P 500 is less clear-cut, could the recent surge in support for the Democrats be a warnings signal for the US stock markets? We think that the hesitation in the S&P 500 could be a sign that the market is nervous about a Democrat not only in the White House, but potentially also in charge of Congress.

All seats in the US House of Representatives, and 100 Senate seats are also up for election on November 8^th. A win for Clinton during tonight’s debate could boost the Democrats’ chance to win back Congress, which is currently controlled by the Republicans. As Clinton has pulled away in the Presidential race, this has also translated into more support for the Democrats running in the Congressional race. Below we lay out a few outcomes from these elections, each assuming a Clinton Presidency, and what they may mean for financial asset prices:

1, Clinton wins the Presidency, but Congress remains under Republican control

This could be the best outcome for financial markets, as it would basically be considered a 3^rd term for Obama. Since the start of Obama’s second term in January 2013, the S&P 500 has risen some 58%. With the republicans in control of Congress they are likely to limit any of Clinton’s more radical ideas for the energy and healthcare sectors, in particular. It is also likely to make tax increases unlikely. Although this is the most politically frustrating outcome, it is the most market friendly, since it is likely to signal continuity, and markets love certainty. We believe this outcome could lead to further dollar outperformance vs. the rest of the G10; US stocks could also resume their uptrend in this scenario.

2, A Clinton Presidency and a divided Congress

We believe the outcome would have a similar impact on the markets as the above, and could be good news for US asset classes.

3, A win for Clinton and a win for the Democrats in both the House and the Senate.

The last time this happened was when Jimmy Carter was President in 1976, when the Democrats held a filibuster proof 60% of all Congressional seats. Back then it was a rocky road for the S&P 500, with it ultimately rising only 11% over Carter’s 4-year term. In contrast, Obama’s second term has seen a near 60% gain for the S&P 500. The dollar also underperformed during Carter’s presidency, which was, in fairness, a tricky time for the American economy, the buck fell13% by the time Carter left office.

While a Clinton victory could initially trigger a relief rally for the markets, as the prospect of President Trump and all of the market risk that entailed is put to bed, it may not last.  A Democratically controlled Congress could makes lots of changes to key sectors of the US stock market, which may unsettle investors who are resistant to change. However, the dollar may fair better under Clinton compared to Carter, but it all depends on the Fed. The prospect of rising treasury yields has been the building blocks of this dollar rally. If the Fed is likely to remain unchanged under a President Clinton, and if Yellen and co. embark on a faster pace of rate increases than we are used to, then we may see the dollar outperform its G10 counterparts in the coming years.

Watch for our debate wrap up written by our US analyst post the debate, also follow @CityIndex on Twitter fro live tweets during the debate.