Deutsche Bank thinks European stock markets could tank by as much as 10% if Donald Trump wins Tuesday’s US election, while shares could jump up to 5% if rival Hilary Clinton is successful.
European markets are likely to experience big moves when the final polls come in, with the election seen as one of the two biggest global political events of 2016 alongside Brexit. The Times reports that Barclays and HSBC will both keep trading desks open all night to react to news as it comes in.
Deutsche Bank’s team of equity analysts, led by Tom Pearce, have tried to quantify the exact impact or a Trump of Clinton victory for Europe. Pearce and his colleagues have analysed the Euro Stoxx 600, which measures the performance of 600 key stocks across 17 European countries, to try and gauge how it may shift depending on either result.
Their findings suggest that, broadly speaking, a Clinton win is largely priced in by the markets but would still provide a boost to stocks. Meanwhile, the market reaction would be strongly negative if Trump wins.
Deutsche Bank argues that not only would there be an initial negative reaction to a Trump victory, it would also cause a medium-term depression of stocks because his policies remain unclear. Here’s the crucial extract from Deutsche’s research (emphasis ours):
Trump’s plans include significant changes in taxation, immigration and trade — and messaging on his policies has been far from consistent. As a consequence, we think a Trump win would likely lead to a considerable rise in US policy uncertainty. We re-run our Stoxx 600 P/E model to include US (rather than EU) policy uncertainty. The US policy uncertainty index currently stands at close to 100, around the lows of the last 10 years.
We find that every 10-point increase in the index is associated with a 1.5% de-rating for the Stoxx 600. The model suggests the market is already priced for a 45pt rise in uncertainty following the recent sell-off. A rise in uncertainty to the levels reached during the 2011 debt-ceiling dispute would imply a further 100pt increase in uncertainty relative to what is currently discounted (pointing to around 15% additional downside for equities).
However, given that the 2011 episode was exaggerated by the Euro area crisis, we think the uncertainty impact of a Trump win would be only around half that amount, implying some 5-10% downside. We note that rising US uncertainty has been associated with falling bond yields in the past.
Much of the negative reaction would be down to the surprise element of a Republican victory. Parallels can be drawn with the referendum on Britain’s membership of the European Union in June. Markets were prepared for a Remain vote and the pound went into free fall when it became clear that Leave would carry the day. Chaos could briefly reign on Tuesday nad Wednesday if Trump pulls off a similarly surprising victory.
Four of Deutsche Bank’s key charts from their research, circulated to clients on Friday last week, are shown below:
On the other hand, here is what Deutsche Bank thinks a Clinton victory means for European markets (emphasis ours):
Given that Clinton’s policies are much less radical than Trump’s and have been communicated more consistently, we expect the current uncertainty premium to be removed from markets in case of a Clinton victory. A partial reversal of the 45-point increase in uncertainty currently being priced in, according to our P/E model, should lift the Stoxx 600 by around 5%. Clinton’s fiscal stimulus proposals are significantly lower compared to Trump’s and she would also very likely face political roadblocks in a Republican-controlled House of Representatives. As a consequence, large-scale fiscal stimulus would be even less likely in this scenario.
Deutsche Bank’s conclusions on Clinton are consistent with what is going on in financial markets on Monday. Stocks across the globe, particularly in Europe, are climbing on Sunday’s news that the FBI has once against cleared Clinton over emails on her personal server. The failure of the FBI to find any reason to charge Clinton likely increases her chances of winning Tuesday’s election and becoming president. Stocks are rallying as a result.
Clinton has been the favourite throughout the race and currently has a two-thirds chance of winning, according to the well-respected FiveThirtyEight Election Forecast. The US goes to the polls on Tuesday November 8.
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