“I don’t think markets will be too bad actually,” said a head of SSA DCM in London. “It’s looking less and less likely that there will be a Trump victory, but even if there were, the markets will adjust pretty quickly.”
The election of Republican candidate Donald Trump would, according to a number of SSA bankers, likely cause a rush to safe haven assets, a sell-off in equity, and a widening of credit spreads. However, the head of SSA DCM believed that the volatility would likely abate within a few days.
That is because quantitative easing — particularly the European Central Bank’s asset purchase programme — remains the primary driver of price and market sentiment. “If they keep buying, and keep pushing up asset prices, investors will have to keep investing," he said.
While the US election is important for issuers, the ECB statement on December 8 is, according to one senior SSA banker, an event with even more potential to upset and disrupt the market. Perhaps even more so than the result of the Italian referendum on December 4.
Although doubts have emerged over the ECB’s ability to continue its programme in the face of a contracting universe of eligible bonds to buy, it has expanded the scope of its programme and the consensus view among bankers is that rates will stay low. A member of the Bank of Italy’s executive board said in testimony to the Italian parliament on Monday that there was no prospect of the ECB tapering QE.
2016's final fling
Clarity is certainly important, with many market participants saying that, provided the result is not disputed, the identity of the winner is of secondary importance. Although the CME Group’s FedWatch Tool, which tracks Fed Fund futures prices as a proxy for investor expectations of rate rises, showed a correlation with Clinton’s success in the polls, some bankers believe that the US economy is performing well enough for the Fed to raise rates regardless of the election result.
However, even if Clinton wins, the market is likely to remain fairly subdued for the rest of the year, with the vast majority of SSA borrowers already at an advanced stage in their funding programmes.
“With the deposit rate as costly as it is, it is unlikely that issuers will be keen to do much in the way of pre-funding,” said the head of SSA DCM.
Still, a number of factors will combine to make the early months of 2017 a busy time, particularly in dollars, and issuers might be advised to brave the cost of carry and source funds in 2016 to avoid issuing in a crowded window with spreads under pressure.
“Euros will remain difficult, thanks to the negative spreads,” said an SSA syndicate banker. “So issuers who are able to will likely opt for dollars.”
That, combined with recent reform of US money market funds which will force borrowers to look for benchmark rather than CP funding, will make for a crowded dollar market in January. “I wouldn’t be surprised to see some borrowers look for short dated dollar benchmarks before the end of the year to avoid issuing too much in January,” said a head of SSA DCM.
While some market participants are downplaying the importance of the identity of the election winner, that does not mean that the political climate is likely to prove easy to navigate. Even if Trump loses, he is part of a political movement that is not going away, they said.
A Citi research note published on Tuesday said that vox populi is an increasingly important policy driver and the results — increased trade protectionism, a shift from monetary to fiscal policy, and spiralling debt — will have serious consequences for the economic outlook.
