This year has been traumatic for capital markets, with early year volatility, Chinese currency high jinks and mid-year pre-Brexit presenting just some of the obstacles to a stable market in 2016.
However, the mother of all macro-economic shocks could befall markets in a week’s time if Donald Trump pulls off a surprise electoral victory.
Almost all GlobalCapital's sources in the US when asked about the election, often find it difficult not to laugh at Trump's tragicomic campaign. But comedy aside, almost all are fearful that the positive momentum that has been achieved by the capital markets in the past few months will be cast aside if Trump wins.
Many of those expressing concern at the prospect of a Trump victory have little love for Hillary Clinton, with one ABS industry practitioner declaring: “I’ve always voted Republican but I have no idea what to do in this election.”
The prevailing fears in the market do not often concern Trump’s policy positions, which are neither detailed, nor comprehensive, just a week out from the election. Rather, it is the instability stemming from a Trump administration that concerns financial market professionals in the US.
Who works for Trump?
The first and perhaps most immediate concern would regard President Trump’s appointments. While he would immediately be able to change the leadership of the US Treasury Department through his choice of treasury secretary there would be several other key financial roles which he would be likely to appoint.
The leaders at the Securities and Exchange Commission, for example, are appointed by the president and another source wondered “who on earth” Trump would appoint to that regulator.
Trump has also been highly critical of the Federal Reserve during the campaign and commentators have suggested that if he were to win the general election, Fed Chair Janet Yellen might resign, leaving the new president to fill the vacancy.
Even if Yellen stayed on under a Trump administration, he has pledged publicly that he would replace her anyway when her four year term ends.
Other essential appointments needing a safe pair of hands include the directors of the Federal Housing Finance Agency (FHFA) — which has oversight over Fannie Mae and Freddie Mac— and the Department for Housing and Urban Development, among others.
Confidence abroad
Trump's appointments could make or break confidence in the US economy but there is a fear that the damage may be done well before he would even take the oath of office.
The US's reputation abroad is a top concern for issuers as many markets, including securitization for example, are the beneficiaries of large levels of foreign investment.
This is because the country is seen as a relatively safe investment haven in the middle of stormy macro-economic seas, and a rare economy with positive interest rates.
Issuers have spoken about receiving heightened interest from Europe after the Brexit vote, given the implications that decision could have on the EU, and Asian and Japanese buyers have played a big role as well. In particular, large Japanese banks propped up the US CLO market during the volatile months at the beginning of the year.
However, there is concern among foreign buyers over the election and a CLO manager said that the most frequent question he gets when marketing deals abroad is “can Trump win?”
He added that the question was driven by real concerns and that he was “seriously worried” about the future should Trump prevail.
A shock result next Tuesday would damage the image of US stability in the eyes of many institutions outside the US, although perhaps US managers might see a flood of Russian capital, given the reported mutual respect between Russian President Vladimir Putin and the Republican nominee.
However, given the fragility of both the US economy and its markets, especially given a feared turn in the credit cycle in 2017, Trump becoming the US president elect next Tuesday could be a catalyst for chaos that would harm both.