Donald Trump Gains in Polls after Republican Convention; Fed Unlikely to Raise Rates Before Election

By | August 2, 2016

The Republican National Convention (RNC) was a boon to Donald Trump’s presidential campaign, according to the latest polls, which suggested the controversial leader was pulling nearly even with Democratic nominee Hillary Clinton.

According to a July 18-22 national online poll conducted by Ipsos on behalf of Reuters, 41% of likely voters supported Clinton versus 38% who were inclined to vote Trump. Given the poll’s credibility interval of about 4 percentage points, both party leaders should be considered neck-and-neck at this point.

The Republican National Convention was a big boost to Donald Trump, who was trailing Clinton by ten percentage points prior to the event.[1]

The race to the White Home has actually seldom been a factor in the financial markets in recent months, as investors monitored developments abroad, including the United Kingdom’s decision to leave the European Union on June 23. The presidential race is likely to illicit stronger response from market participants the closer we get to November.

Against this backdrop, the markets continue to speculate about the pace and timing of future interest rate adjustments in the United States. According to Fed Fund futures rates, investors believe there is less than a 50% chance that the Fed hikes rates this year. Far fewer expect a change in policy before the November election.[2]

However, latest batches of economic data are making a strong case to begin normalizing policy sooner rather than later. Reports on nonfarm payrolls, industrial production, retail sales and manufacturing output have all beaten on forecasts in July, a sign that the US economy had regained momentum after a disappointing start to the year.[3]

The Federal Open Market Committee (FOMC), the central bank’s policy-setting body, has actually only three interest rate meetings left this year. The September meeting is highly anticipated because it will be the last one before a brand-new president is announced.

Experts are increasingly warning of a Trump triumph in the November election. A Trump presidency is generally associated with warnings because nobody knows exactly how the market will respond.

Chris Iggo of AXA Investment Mangers happens to be one of those experts worried about what a Trump presidency entails for the financial markets.

“Brexit-shocked investors are now considering the reality that Donald Trump’s election as president of the US could be the next source of political and economic uncertainty in this extraordinary year,” Iggo said, as quoted by the Financial Times.

“Mr. Trump’s mooted policy on redeeming Treasury debt under par could also have a radical impact if it were followed through … The very foundation of the global financial system is in part based on the confidence that Treasury debt is backed by the full faith of the US government — it is a stalwart haven asset class. If there was even a small chance that was no longer the case, the consequences for global markets and investor confidence could be catastrophic.”[4]

For several sensible people, neither one of Trump or Clinton are ideal candidates for the presidency. However, Trump’s wildcard status makes his election potentially more volatile for investors. To put it mildly, nobody knows just exactly what to expect with Donald Trump in the White House.

Globally, central banks are working overtime to ensure that market conditions are conducive to growth. The Bank of Japan (BOJ), European Central Bank (ECB), Bank of England (BOE) and Reserve Bank of Australia (RBA) are all expected to loosen policy even further this year to fend off weak inflation and an uncertain economic environment. Even the US Fed is hesitating about when to raise interest rates. Investors have quickly caught on to the fact that monetary policy will remain highly accommodative for the foreseeable future. This has actually allowed stock markets from Tokyo to brand-new York to rally sharply in the wake of the June Brexit vote. The rally on Wall Street has actually been especially noteworthy, with the S&P 500 and Dow Jones Industrial Average setting consecutive record highs in July.

The markets are bracing for more uncertainty in the run-up to the US election. Donald Trump appears to have gathered considerable momentum following the Republican National Convention. A spate of brand-new Wikileaks documents have also suggested that the Democratic National Committee (DNC) may have rigged the nomination process for Clinton by undermining Bernie Sanders’ campaign. Some 20,000 leaked emails of DNC appear to show a concerted effort to undermine the Vermont Senator’s campaign. Whether true or not, this brand-new email scandal threatens to destroy the Democratic Party’s unity.[5]

The 58th quadrennial US presidential election will take place on November 8, 2016.

[1] Chris Kahn (July 23, 2016). “Trump pulls nearly even with Clinton after Republican convention: Reuters/Ipsos poll.” Reuters.

[2] CME Group. FedWatch Tool.

[3] Sam Bourgi (July 23, 2016). “US Economic Overview: Second Quarter GDP to Signal Stronger Growth.” Economic Calendar.

[4] Michael Hunter (July 24, 2016). “Market Spotlight: Prepare for a Trump win.” Financial Times.

[5] AP (July 24, 2016). “brand-new Email Scandal Threatens Democratic Party Unity.” ABC.

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