Investors are dialing back hedges against a Donald Trump upset victory without abandoning them.
Traders entered the final trading session before U.S. voters head to the polls seeming less certain of the outcome than prediction-market gamblers and polling aggregators. As of last week's close, options bets on where the S&P 500 Index would be the day after the election suggested Hillary Clinton had a 63 percent chance of becoming president, Janus Capital Group Inc. said in an email on Saturday.
Most polling-aggregation forecasts put her odds of beating Donald Trump at more than 80 percent, with FiveThirtyEight an outlier at 68 percent. On websites that take wagers on the winner, Clinton's odds are near or above 80 percent, boosted by Sunday's news that the Federal Bureau of Investigation won't revisit its decision against seeking criminal charges related to her email practices.
The Janus analysis was consistent with how the financial markets behaved on Friday: Traders increased most hedges against a stunning upset by Trump even as Clinton's slide in the polls eased. With investors worried that expectations for a status quo outcome - Democrat in the White House kept in check by Republicans in Congress - could be upended, the S&P 500 fell for the ninth straight session, its longest losing streak since a few weeks after Ronald Reagan's 1980 election. Clinton's lead had plunged when the FBI reignited controversy over her emails on Oct. 28, driving haven assets up and riskier ones down.
Following the FBI's announcement on Sunday, all of those assets have become less hedged against Trump prevailing. The Mexican peso gave back all its losses and then some.
The move toward safer assets is in line with -- though less dramatic than -- what analysts predict if the Republican wins, much like the aftermath of the U.K.'s June vote to leave the European Union. "In case of a Trump win, we envision a violent flight to quality," Barclays Plc said in a report. A Democratic sweep may also be disruptive, but that possibility is increasingly remote. JPMorgan Chase raised a third potential surprise in a report that it said would produce a similar market reaction. The title: "I demand a recount."
Over the longer term, both candidates want to increase spending and cut taxes, which would be bullish for stocks and bearish for fixed income. Below is a look at potential winners and losers. But first, a caveat. Investors' immediate reaction to U.S. elections often doesn't last, as illustrated here.
- Clinton wins: "The market has already priced in a Clinton victory," said Margaret Yang, a CMC Markets analyst in Singapore. "Any upside will be limited if she wins." Barclays said in a report that the S&P 500 Index could gain as much as 3 percent.
Beyond an initial "risk-relief rally on the prospect of policy continuity and predictability," Deutsche Bank said that Clinton's plans to limit the capital gains tax break may "have negative/dampening impact on some key risk bellwether assets like equities into the turn of the year."
The biggest losers would be finance and drug companies.
"A potential Democratic sweep would represent one of the toughest election outcomes for banks," Morgan Stanley said in a report, citing the risk of tougher rules and tax changes that might hurt companies like Goldman Sachs and JPMorgan. Moves against carried-interest rules that benefit asset managers, also targeted by Trump, would hurt firms including Janus Capital and Waddell & Reed Financial Inc.
Under Clinton, pharmaceutical and biotech stocks "could be hit by renewed pressure to curb price increases on drugs," BlackRock researchers said in a report, noting her complaints about rising costs. Citigroup cut its rating on the European health-care industry to underweight in September, citing U.S. election risks. Drugmakers Novo Nordisk and Roche Holding have trailed the broader market this year as Clinton's prospects rose, with the shares gaining only during times when her polling numbers fell.
Hospital operators and Medicaid providers such as HCA Holdings Inc. and Universal Health Services Inc. may benefit from continued Affordable Care Act subsidies, according to analysts from Strategas Research Partners, LPL Financial Holdings Inc. and Credit Suisse Group
Her plans to reduce dependence on fossil fuels would boost alternative energy producers, with Morgan Stanley touting the prospects of Sunrun Inc. and NextEra Energy Inc. under Clinton. Strategas also likes First Solar Inc. in that scenario. Evercore ISI adds General Electric Co., Tesla Motors Inc., SolarCity Corp. and Exelon Corp. to the list in its pre-election report.
A Democratic sweep increases the odds for a minimum wage hike, which cuts both ways for consumer stocks, Morgan Stanley said.
- Trump wins: "Valuations of U.S. equities are quite high, and a Trump victory will trigger a massive selloff," CMC's Yang said. Many would consider that a classic "black swan event," she added, so the reaction would be "much more severe" than Brexit, which caused the S&P 500 Index to fall 5.3 percent in two days as benchmarks in Europe and elsewhere lost even more.
Barclays predicted an S&P 500 nosedive of as much as 13 percent if Trump wins. Citigroup equity strategist Tobias Levkovich put the hit at no more than 5 percent in a report.
Judging the Republican's longer-term impact is difficult to assess because "some of Trump's policy proposals are so unconventional (trade, immigration) and others so vague (fiscal)," said John Normand, JPMorgan's head of foreign exchange, commodities and international rates research, in a report on Friday.
BlackRock's analysis of the correlation between the two candidate's polling numbers and sector stock performance suggest drugmakers, insurers and banks are expected to do better under Trump. Bloomberg News did a similar analysis for individual U.S. stocks.
Even some of these sectors, however, face Trump-related risks. He favors repealing Obamacare and allowing the importation of prescription drugs, which could hurt pharmaceutical companies, Morgan Stanley said. And finance companies may prefer Trump, but BlackRock warned that repealing the post-crisis Dodd-Frank law, derided by the industry's Republican allies, may result in "simpler and blunter but equally onerous rules."
Companies that build and maintain civil infrastructure, such as Caterpillar Inc. and Ingersoll-Rand Corp., would have bigger opportunities for government work under Trump, given that his plans for such spending are much more ambitious than Clinton's. The same holds true for military contractors, Credit Suisse said.
Morgan Stanley sees NRG Energy, which uses coal to produce electricity, benefiting under a Republican White House, due to less regulation and slower growth in the use of renewables. The bank said consumer stocks could be hurt by a Trump win because tougher immigration restrictions could crimp labor supply and consumer demand.
The Japanese stock market may get hit harder than others, falling as much as 10 percent due to the yen strengthening, Citigroup said Friday in a report. "There could be investment opportunities in infrastructure names and military-related stocks in any subsequent correction," the report said, citing Hitachi, Nippon Steel & Sumitomo Metal Corp. and Mitsubishi Heavy Industries, among others.
- Clinton wins: A victory by the Democrat would initially drive up yields as investors sell off Treasuries in favor of riskier assets, Bank of America Corp. analysts said in a report. Ripple effects would raise borrowing costs for individuals and corporations worldwide because U.S. sovereigns are the global debt benchmark.
Yields on 10-year U.S. bonds have risen as much as 36 basis points since Clinton's lead over Trump started widening in late July, and the bank's analysts called the Democratic Party's improving prospects "a major factor" behind that move. They've fallen a bit since the Oct. 28 announcement that the FBI would examine more Clinton-related e-mails.
Market participants surveyed by Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, predicted an average increase of 5 basis points if Clinton wins, he said. Normand sees a much smaller reaction, titling the Clinton section of his report "next to nothing changes."
Over the longer term, a Clinton victory would do little to yields -- as long as Republicans retain control of at least one chamber of Congress -- because her fiscal stimulus would be relatively small, especially compared to Trump's plans for bigger tax cuts and more infrastructure spending. A Democratic sweep would likely result in more spending and may drive yields higher.
Municipal debt could gain under Clinton because any increased taxes she imposes on the wealthy would make tax-free bonds more attractive, BlackRock said.
- Trump wins: In the two weeks after the U.K. gobsmacked pollsters and voted to leave the EU on June 23, the U.S. benchmark 10-year yield fell 39 basis points and didn't return to pre-Brexit levels until September. Something akin to that may happen if Trump defies conventional wisdom. Credit Agricole predicts a "massive disjoint" that would send 10-year yields down at least 10 basis points if he prevails. Lyngen's survey average predicted a smaller drop. JPMorgan's Normand said the yield would fall below 1.7 percent in the days after a Trump win, from 1.78 percent on Friday.
After the dust settles, Trump's tax cuts and infrastructure-spending plans may drive yields back up, especially if Republicans hold both the House and Senate. That impact could be exaggerated if the Republican's isolationist foreign policy prompts countries with large Treasury stakes to unload them, Credit Agricole analysts said. Fiscal largess would also benefit inflation-linked bonds, which already are outperforming nominal securities this year.
Yields would only remain flat under Trump, according to Bank of America, in the unlikeliest event of all: President Trump finds himself up against Democrats controlling both houses of Congress, because they would resist his massive tax cuts.
Trump's support for fossil fuels could spur a rebound for energy industry bonds, especially high-yield ones, after two years of major losses in the commodities slump, Wells Fargo & Co. said in a report. As for munis, "Trump's plan to slash personal tax rates could deal a blow to the asset class," BlackRock's report said.
- Clinton wins: The U.S. dollar would gain versus other developed-market currencies, with the Democrat heading toward the White House as traders focus attention on the likelihood that the Federal Reserve will raise rates in December, according to Capital Economics, a London research firm. Down the road, Bank of America sees the greenback gaining under Clinton only if the Democrats take Congress.
Emerging-market currencies would see "modest and transitory" gains because a Clinton win "is mostly -- but not fully -- priced in," though Russia may be an exception, Societe Generale SA said in a report. Mexico's peso would benefit the most, the report said. It has acted as a barometer of the presidential contest, moving in tandem with her chances of defeating a candidate who wants to revamp trade deals, restrict immigration and make the U.S.'s southern neighbor pay for a border wall.
If Clinton triumphs, the peso would gain 4.3 percent gain from Friday's close, and the Canadian dollar would also rise, though not quite as much, Normand of JPMorgan said before the latest FBI news. Elsewhere, most Asian currencies would rally 2 percent or so in relief, said Cliff Tan, a strategist in Hong Kong for Bank of Tokyo-Mitsubishi UFJ.
- Trump wins: The foreign-exchange markets this week are suggesting what might happen if the Republican triumphs, with the dollar tumbling against most major currencies and the Mexican peso bucking the trend as one of the worst performers against the greenback. Societe Generale sees Mexico's currency 17 percent weaker than Friday's close, while Bank of America said traders already "have gone a long way toward pricing in a surprise Trump victory."
JPMorgan's Normand predicted one-day slides of 8 percent for the peso and 5 percent for the Canadian dollar -- based on a President Trump's power to impose protectionist measures unilaterally. The currencies of the U.S.'s neighbors would then recover some, he said, with Mexico's central bank intervening to defend the peso and Congress moving to restrain Trump's trade policies.
Other developed-market currencies including the yen, euro, pound and franc may also gain on concern that China would dump U.S. assets and the Fed would delay tightening monetary policy, analysts said. Normand sees the yen gaining 3 percent. Commodity-linked currencies including the Canadian dollar also "would lose ground," BMO said. The greenback could then rally in a three- to nine-month horizon as Republicans usher in tax cuts and other fiscal stimulus to boost economic growth, Bank of America said.
The candidate's hostility toward China -- including threats of steep tariffs over alleged currency manipulation -- likely would drive the offshore yuan down about 3 percent by year's end, said Ken Cheung, a foreign-exchange strategist at Mizuho Bank Ltd. in Hong Kong. Longer term, the currency may fall more gradually under Trump as he exerts political pressure on the country's leaders to slow its depreciation, said Xu Gao, an economist at Everbright Securities Co. in Beijing.
Risk aversion in the aftermath of a Trump win would also push down other developing-world currencies on fears that his protectionist stances could hurt emerging economies by reducing imports from them. That "could be negative for high-yielder countries," Credit Agricole said in a report. The South Korean won may take a hit, given questions that Trump has raised about the need for U.S. troops on the North Korean border.
If Republicans sweep, the euro might fall against the dollar, BMO said, because they would be inclined to open a foreign-earnings repatriation window for American companies to bring money back home, and "a high concentration of U.S.-based multinationals' earnings are held" in Europe.
- Clinton wins: It'll be risk-on if the Democrat retains control of the White House, which bodes well for developing markets.
Investors may respond by bidding up Chinese defense shares because Clinton comes across as the more hawkish candidate, said Francis Cheung, head of China and Hong Kong strategy at CLSA. Commodity producers in the developing world might rally on expectations that U.S. demand will increase along with infrastructure spending.
- Trump wins: "I can't think of any country that would benefit if Trump wins," CMC Markets' Yang said. Evercore's report mentioned one nation that might get a boost, suggesting investors buy Russian equities to hedge against the Clinton-leaning polls being wrong.
Nadia Kazakova, a Russian oil and gas specialist for Saxo Group, said she's not convinced the country would benefit economically from Trump. If he wins, the global shock "could strike Russian markets much harder than others" due to risk aversion and falling commodities. "And as Trump makes America great again, would he still have the heart for a great deal with not-so-great Russia?" she wrote in a report.
Citigroup sees the MSCI Emerging Markets Index immediately falling at least 10 percent, with Mexican stocks leading the way down. The Institute for International Finance explained why in a report on Thursday: "Nearly 80% of Mexico's exports go to the U.S.," and "workers' remittances are one of the three largest sources of foreign currency," behind oil and tourism.
One possible bright spot for Mexico: Construction companies such as Cemex SAB de CV may be positioned for contracts to build Trump's proposed border wall.
In Asia, "China will bear the brunt of risks if Trump wins," said Ken Peng, an investment strategist at Citi Private Bank in Hong Kong, by phone. "He'll probably introduce trade policies targeted against China," weakening its economy.
Protectionist U.S. policies also would be "bad for a lot of economies that rely a lot on exports," said Ben Bei, an analyst at CIMB Securities Ltd. in Hong Kong.
Peng said exporters from South Korea and Taiwan are among those with the most to lose. Yang adds Southeast Asia exporters to the list, including companies in Indonesia, Singapore, Thailand, Philippines, Malaysia and Vietnam. Citigroup called Latin America "most vulnerable" to U.S. protectionism.
To the extent that Trump is less welcoming to workers from abroad, his victory may hurt the Philippines' broader economy, which gets the bulk of its overseas remittances from Filipinos employed in the U.S., Yang said.
"India and Indonesia will be least affected if Trump wins," due to their robust domestic growth, Peng said.
- Clinton wins: Her environmental policies, especially her promise to combat climate change, will put pressure on coal and oil. The natural gas market could get a boost from her pledge to wean power plants off coal by using gas as "a bridge" to more reliance on renewables.
- Trump wins: Natural gas prices likely would suffer as coal benefits under Trump. He has promised to roll back environmental rules that squeeze coal out of the U.S. power market and promoted "clean coal" during one of the debates. Bloomberg Intelligence in September estimated that a victory by the Republican would shave 11 percent off natural gas demand in 2030 from last year's levels, boosting coal use.
Oil prices could get a lift from the return of a risk premium if Trump continues with the "bellicose language that's been heard on the campaign trail" about Iran and scraps President Barack Obama's nuclear deal with the country, said John Kilduff, a partner at Again Capital, a New York hedge fund focused on energy. JPMorgan's Normand sees Brent crude oil rising to $54 a barrel by year's end, an 18 percent gain from Friday, but not before falling 5 percent initially "in sympathy with equities, much as occurred after Brexit."
Gold, platinum and silver would the "biggest winners" if Trump wins, said Yang, the CMC Markets analyst.
Since the day before the FBI's surprise announcement about the Clinton e-mail inquiry on Oct. 28, all precious metals have risen. Normand sees gold immediately rising to $1,350 an ounce if Trump wins, 3.4 percent higher than Friday, before retreating in the next month to $1,225.
Copper may also get a bounce, Barclays said, citing moves in the metal's price during the campaign suggesting "a Trump-related premium" based on his plans to boost spending on bridges, roads and the like. Normand disagrees, calling Trump's "gargantuan infrastructure ambitions" too vague and unrealistic to support base-metal prices for long. Given the danger his trade agenda poses to Asian growth, he sees copper immediately falling 3 percent if Trump wins.