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Market Preview: US Election Outcome

With only hours to go before the definitive outcome of the 2016 US presidential election is known, financial markets are fluctuating in nervous anticipation of the results. Stock markets have essentially decided already that Hillary Clinton will prevail over Donald Trump, but are still slightly cautious of any surprise outcome. US equities turned back up in morning trading, but not quite as strongly as on Monday after the FBI gave Clinton a substantial boost over the weekend. The US dollar has been mostly flat to slightly higher after Monday’s surge, and gold was trading lower but in a relatively tight trading range after yesterday’s plunge.

Projected market reactions in the immediate aftermath of tonight’s election outcome appear rather clear, but further down the road as the victor prepares to take office becomes significantly murkier. In the past several weeks, we have already gained a somewhat well-defined view of how markets are likely to react directly after a win by either candidate.

Immediately after a Clinton win, which is the more expected scenario, equities and the US dollar should be boosted as Trump-driven uncertainty would be eliminated for both investors and the Federal Reserve. Clinton’s image of status quo stability should foster more initial confidence in the highly risk-averse equity markets, while providing the perception of market stability that the Fed will need in order to raise interest rates in December. At the same time, this relative stability for stocks and the dollar, along with a higher potential for a near-term Fed rate hike, should pressure gold prices further.

But that would only be the likely initial market reaction to a Clinton win. Although Clinton may currently represent more stability for the markets when compared to Trump, many of her policy stances are seen as unfriendly to Wall Street and big business. This includes heavily increased financial regulations as well as generally higher penalties, taxes, and limitations on banks and large corporations. Ultimately, these positions could help drag down markets, including both equities and the dollar, in a Clinton Administration.

In the opposite scenario of a surprise upset by Trump tonight, the immediate market reaction is likely to be a rapid dive for stocks and the US dollar as uncertainty for investors and the Fed will have been magnified. This uncertainty should also translate into a quick surge for safe-haven gold.

Again, however, an unexpected Trump victory would likely have different consequences going forward. With Trump’s key policy stances on financial de-regulation, dramatically lower corporate taxes, and a focus on US industrial growth, equity markets and the dollar could rise and strengthen after the initial uncertainty wears off. In this event, gold would likely be pressured further. A big caveat here, however, lies in how long it might take for the uncertainty and unpredictability surrounding Trump to diminish.

The bottom line for the markets is that the outcome of tonight’s election is expected to trigger certain immediate reactions as noted above, but whether these reactions are sustainable is an entirely different story. Whichever candidate wins, however, one thing is almost assured – markets will move substantially late tonight, tomorrow, and likely for the rest of the week.

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