Financial Markets “Waking Up” to a Trump Presidency
The US financial markets are just now “waking up” to the possibility of a Donald Trump Presidency in the wake of Hillary Clinton’s numerous health problem’s and tightening polls, that according to Bank of America Merrill Lynch (NYSE:BAC) Head of Global Rates and Currencies Research David Woo.
Mr. Woo says some investors are still underestimating the real estate mogul’s chances of ascending to the highest office in the land, and what a seismic change this could be for markets and the world’s largest economy.
While the outsider candidate poses a risk to 1 of Y 2016’s hot investment strategies, he could prove to be a massive boost for the Buck and US economy.
“The US economy would take off in a big way” if Donald Trump were elected and Republicans control both legislative houses next year, Mr. Woo said, thanks to the fiscal stimulus that he would enact. Donald Trump has pledged to spend at least 2X as much as the Democratic nominee on infrastructure and also enact a massive tax cut, 2 measures that would entail a renewed issuance of US Treasuries.
Against this scenario, the USD would strengthen and US Treasury yields would rise, a view shared by Mr. Woo and other fixed income investors too.
Mr. Woo warns that the risk parity strategy in particular, which entails a long levered position in US Treasuries and a long position in stocks to better diversify risk levels across different asset classes, would be imperiled if Mr. Trump emerges victorious.
The Wall Street strategist connected the rise of Donald Trump relative to Mrs. Clinton in national and battleground state polls to the under-performance of risk parity trades, though it is difficult to see how the proximate cause for the bond selloff has its roots in the US rather than overseas.
“In the last 4 years, we have had 2 instances of massive unwinding of the risk parity-trades,” he said during an interview on TV Monday. “At this point, the risk to the risk-parity trade is just as big.”
As it stands now, David Woo sees the market pricing in a Clinton victory without a Democratic sweep in the US Senate and Congress, implying that monetary stimulus from the US Fed will remain the tool left to support growth. So far that has been overall marginally successful