In this second of a three-part series, Paresh Upadhyaya shares his thoughts on the potential implications of a Trump or Clinton win for the USD and fixed income markets.
What would a Trump victory mean for the Federal Reserve Board and how would it influence fixed income and currency markets?
Trump has been highly critical of the Fed and accused it of being political by keeping interest rates low. Trump’s first opportunity to replace Chair Janet Yellen would come when her four-year term is up in 2018. Before that, he cannot fire Yellen, but he can diminish her authority with appointments to fill two vacancies on the Fed’s seven-member board of governors, and, significantly, he can designate one as the heir apparent. The market reaction would likely be positive for the USD and negative for fixed income and risky assets in general, since Trump is likely to appoint hawkish candidates.
What would the fiscal policies of Clinton and Trump mean for US fixed income markets?
Both candidates have proposed easier fiscal policy with an increase in infrastructure spending. According to the non-partisan Committee for a Responsible Federal Budget, Clinton’s proposals would add an estimated $200 billion to the national debt over a decade, while Trump’s proposals would add $5.3 trillion (see chart below.) The key difference between the Clinton and Trump proposals is that Trump has much greater infrastructure spending and large across-the-board personal income tax cuts.
The combination of greater stimulus to the US economy and rising debt should put upward pressure on Treasury yields. In response, this would likely prompt the Fed to tighten at a faster pace.
Sources: Pioneer Investments analysis on Tax Policy Center, Congressional Budget Office Data, as of October 15, 2016.
What’s your perspective on the impact of the election on different sectors of the credit market?
Under a Clinton presidency, the financial sector could get hit with further regulations. Pharmaceuticals, biotech, energy, restaurants and retail sectors are likely to be underperformers, while investments tied to infrastructure and the alternative energy sector may benefit. Under a Trump presidency, policy uncertainty, his potentially volatile governing style and fluid decision-making pose risks to many sectors.
What are the implications of the election for the US dollar?
If Clinton wins the election, the USD is likely to perform in line with the current macro backdrop that will likely be favorable for moderate USD appreciation. A slight widening in interest rate differentials in favor of the USD would be the key driver fueling a modest USD rally.
On the other hand, a Trump win has the potential to hurt the USD. A key part of Trump’s agenda is to push for free and fair trade. He cites several nations, particularly China, for not following fair trade and has threatened large tariffs. The President has unilateral power to implement tariffs and trade sanctions without congressional approval. Historically, protectionist sentiment is a big negative for the USD.