Here's how markets could react to the 3 most likely election outcomes

There is plenty of uncertainty going into Tuesday night’s US presidential election, with Hillary Clinton holding a slim lead over Republican nominee Donald Trump in most national polls. Additionally, both houses of Congress appear to be in play to go either way.

Lewis Alexander and the rest of the economists at Nomura attempted to parse out just how the market would react in the event of three different outcomes on election night.

Based on current positioning and polling, Alexander’s base case is a Clinton win and a Republican House of Representatives which would be a slight upside to markets.

On the other hand, a clean sweep for Democrats would be a slight negative while a Trump win and clean sweep for Republicans would lead to a more substantial risk-off selling.

Here are the three scenarios as Alexander sees them and what they mean for markets:

  1. Clinton victory, Republicans maintain House control: This would be in the Nomura economist’s opinion a “non-event” as it is the most likely scenario and priced into markets, but cash could “come off the sidelines.” The US dollar index would strengthen 0.5%, moving up the most against the Japanese yen and stocks would tick up in a “moderate relief rally.” The Mexican peso would strengthen considerably against the dollar.
  2. Trump victory and Republican sweep: A Trump victory would lead to a “decent flight-to-quality move” into Treasurys and drive yields down 23 to 35 basis points. The US dollar index would weaken by 1.3% and the Mexican peso would weaken considerably. Stocks would fall 3 to 5% and continue to fall throughout the rest of the year.
  3. Clinton victory and Democratic sweep: The unlikely nature of this event and the possibility of some of Clinton’s more extreme tax policies come to pass would be a slight negative. The US Dollar index would strengthen by 1.9%. Stocks would sell off around 2% to 4%.

Here’s the moves for major asset classes for each outcome in chart form:

Nomura noted that it could be a long time before the outcome of the election is known. If it is a resounding Clinton win, that may be known as early as 11 p.m. However, a closer race may not be called until the next morning after trading has begun in earnest.

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