Advice for Investors

World Markets Bracing For A Trump Win

  • Why it matters

    Why it matters

    Investors and central bankers around the globe fear that a Trump presidency may cause turmoil in markets weakend by years of expansionary monetary policy.

  • Facts

    Facts

    • A Trump presidency is looking more probable according to recent voter polls.
    • Global markets fear a Trump presidency could bring trade tariffs and protectionist policies.
    • The U.S. is still the world’s most important economy and the dollar still the global reserve currency. A shock to the U.S. system would be felt around the world.
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    Audio

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Trading On The Floor Of The NYSE While U.S. Stocks Rise On Deal Activity As Election Looms
Traders on the floor of the New York Stock Exchange this week. Markets are starting to brace for a Trump victory. Source: Bloomberg

For a central banker, Augustin Carstens has a surprising penchant for metaphors. The Mexican Central Bank chief recently called Donald Trump, the Republican presidential candidate, a “cyclone.”

A cyclone that could sweep through the economy of his country, that is. But Carstens not only has a sense for rhetoric, he’s also a prudent person. And so he has taken precautions and laid out a contingency plan for the event that Mr. Trump is actually elected president of the United States.

The central bank head is already feeling the first gusts of wind. Since opinion polls have started giving Mr. Trump a realistic chance of winning, Mexican financial markets have been going crazy. A Trump presidency would be nothing less than a disaster for a country that ships nearly 80 percent of its exports to the United States. Mr. Trump doesn’t only want to build a wall up to 25 meters high along the Mexican border. He wants to cancel the North American free trade agreement NAFTA and impose tariffs on imports.

Fears of a Trump win are rampant across the global financial markets. “Should Trump actually win, a selloff is to be expected in global financial markets,” said Paul Richards, president of Medley Global Advisors, an information service for institutional investors.

The stock market's so-called fear barometer, the VIX index, shot up by more than 9 percent on Thursday to the highest level since shortly after the Brexit referendum.

“In the short term, we saw a similar reaction after the British Brexit vote at the end of June,” said Kristina Hooper, U.S. equity strategist of Alliance Global Investors. The morning after the vote, the German benchmark index DAX fell by around 10 percent and the global equity index MSCI World dropped over seven percent. The U.S. Treasury Department is readying itself for similar turmoil in international currency markets.

Investors hate nothing more than uncertainty. And to be judged by Trump’s erratic actions so far, only one thing is certain: he will pursue protectionist policies. Fever charts on Wall Street have been rising since last Friday. The stock market’s so-called fear barometer, the VIX index, shot up by more than 9 percent on Thursday to the highest level since shortly after the Brexit referendum. Also, the price of gold, traditionally a haven for frightened investors, is climbing, and now registers at more than $1,300 and ounce. At the same time, investors are saying goodbye to equities and to the dollar. The American S & P 500 has fallen eight days in a row for the first time since October 2008 — the height of the financial crisis. The dollar has relentlessly lost ground to the euro.

The fears are well founded. Even after the meteoric rise of large emerging countries like China — the United States is still the global economy’s center of gravity. The United States still accounts for a quarter of global economic output. Despite a constant chorus of swan songs, the dollar is still the global reserve currency, making up 60 percent of global foreign exchange reserves.

 

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A central concern of the recent turmoil is that an economic downturn in the United States would have enormous consequences for the already fragile global economy. An extremely inward-looking policy, attacks on the independence of the Fed, risk-averse and therefore tight-fisted investors, consumers and businesses: all that seems possible during a Trump reign.

Even Germany’s top managers are alarmed. 75 percent of executives believe a Trump presidency will have a negative impact on the U.S. economy, according to the Handelsblatt Business Monitor. Nearly two-thirds of the executives see the German economy affected negatively.

The dollar’s effect on global currencies is evident whenever the Federal Reserve signals a tightening of its monetary policy. After the Fed signaled for the first time in May 2013 that it would end its policy of cheap money gradually, banks and hedge funds withdrew billions from the major Asian emerging economies, Russia and Brazil. Since then, sums of money have flowed into some highly-indebted emerging market companies, which now once again could be withdrawn abruptly. “The emerging markets would initially be hit significantly harder than the West,” said Mr. Richards.

 

 

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Thomas Mayer, Chief of the Research Institute of Flossbach von Stork in Cologne, said: “The global economy has become fragile partly because its has been flooded by money from central banks for years, making it vulnerable to shocks of all kinds.”

One such shock could come in the form of a President Trump with his protectionist ideology. Mr. Mayer sees parallels to 1930, when the U.S. Government dramatically increased tariffs — and sparked a global wave of protectionism. This was one of the causes of the Great Depression.

“Even trade with China would probably be restricted by new punitive tariffs,” said analysts at German bank M.M. Warburg. “Protectionist thoughts meander like a red thread through Trump’s speeches, and structural change would be slowed rather than accelerated.”

Supposedly positive projects like tax relief and a $1-trillion push for infrastructure aren’t stirring any euphoria because they could only be financed by debt — and the United States already has $19 trillion of debt. The history books don’t bode well: according to Deutsche Bank, since the 1930s, nine of the 14 recessions in the United States took place in a new president’s first year.

 

To contact the authors: dschaefer@handelsblatt.com , muenchrath@handelsblatt.com,

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