US election: Threat of market chaos if Clinton loses

Markets have settled on the likelihood of a Clinton win and the banking system is at risk if Trump defies expectations.

Democratic presidential nominee Hillary Clinton arrives to speak at a rally at the Grand Valley State University Fieldhouse on November 7, 2016 in Allendale, Michigan. (AFP PHOTO/Brendan Smialowski)

As the US Presidential election neared and Hillary Clinton became a hot favourite we gained our first peep the how markets will react to the new president.

Given that last week markets were preparing for a possible Trump win, with the tables reversed, there had to be big rises in the sharemarket. And that’s what has happened.

But even more fascinating were the dramas being played out in gold, the US dollar, American bonds, oil and coal.

In recent weeks the gold bulls were preparing for an enormous killing because they believed Donald Trump would win and the impact on the gold market from the consequent rush for yellow metal would be multiplied by the covering of the big gold short positions that had been taken out by hedge funds. The hedge fund short covering and the rush of buyers would send gold through the roof.

Last week, many of the hedge funds became so nervous that the gold bulls might be right that they began buying back the gold they had short sold. The yellow metal rose and the bulls looked supreme.

But come this week and Clinton was again favourite so the odds turned and we saw some of the gold bulls liquidating their positions and gold shorting emerging from some hedge funds. It was not a good night for gold but the yellow metal may come back again.

With gold falling, the textbooks tell us that the US dollar should have risen across the board. But it did not happen and the greenback eased against many currencies including the Australian dollar. That was a surprise because conventional wisdom has the American dollar rising a on a Clinton Presidency. It’s early days but last night was alerting us that conventional wisdom might be wrong.

So we need to look deeper and we quickly discover a second great market tussle — the US bond market.

In simple terms, Hillary Clinton looks to lift the wages of America’s low-paid workers and take other steps that will stimulate an economy that is already doing well, so her Presidency will almost certainly lead to higher US interest rates. That alarms a vast array of international speculators who have been big buyers of US bonds in 2016. At the start of the year, 10-year bonds were trading on a yield of above 2.2 per cent but heavy global buying of bonds in the first half of 2016 sent the yield below 1.4 per cent in July. Enormous profits were made in US bonds. Since July, we have seen a massive exodus from US bonds including heavy selling of 10-year bonds last night, which saw the yield, rise to 1.83 per cent. There are now big losses in the system.

There is no doubt that international bond selling hit the American dollar.

Hillary Clinton says she is going to make America less carbon intensive, so coal and oil should have fallen. Instead they rose. Oil and coal have their own dramas, far removed from the US presidential election.

In the case of oil, Russian President Vladimir Putin and Saudi Arabia’s King Salman bin Abdulaziz both desperately need a higher oil price and they’re skilfully holding OPEC together just as many other forces are conspiring to tear it apart.

The oil market is now more optimistic that they are going to succeed. And remember that, by the end of 2017, demand will have absorbed much of the excess capacity.

And coal rose because the market doubts that the Chinese restoration of production capacity will be fast enough. You will remember that China closed too many of its coalmines and caused a shortage, which caused the price to skyrocket. It’s now moving to reopen them to bring down prices but it takes time.

Still, whatever the reasons it is ironic that on the eve of what the market expects will be a Clinton win, oil and coal should rise.

And given that everyone has adjusted their positions to a Clinton win, if she loses there will be absolute chaos in markets. It could threaten the banking system (Bears beat Trump and Brexit drum, November 3).