Implications of the US elections for the Markets
With the two candidates running head to head (raising fears of a Bush/Gore dejavu where a President wasn’t declared until early December following recount after recount) and with Romney win very much not priced in, it is worth looking into how safe-haven and risk-sensitive FX pairs could react to the result. To begin with, early morning’s sell-off is more likely to be related to the concerns on the Greek vote and Spanish collateral rather than the election. Back to the US, if one considers that according to polls are favouring Obama; an Obama win would have modest impact on asset market, whereas a Romney win would be the big surprise. If Obama does win, we could expect modest buying of fixed income, since the Fed will be encouraged to proceed with its QE. Once the initial win rally (which is expected to be modest anyway) fades away, the fiscal cliff comes into focus, which is negative for the US Dollar. If the election is uncertain, this would probably raise the odds of a Romney win, or at least raising uncertainty, which could cause a sell-off in fixed income and equities. Should Romney win, it is likely to cause massive sell-off in fixed income and equities as well as strong US Dollar buying. Should he back off from his stringent views of where policy is headed, we could see equities and risk-appetite to come back.
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