Buoyed by accommodative central banks, investors' focus is now turning to the US presidential election, and while analysts expect volatility and safe havens to thrive in the lead-up, the impact on Australian markets should be minimal, they say.
With seven weeks until the November 8 election, the first of three televised debates, scheduled for 11am AEST on Tuesday (9pm on Monday in New York), may result in some jostling in the markets, which have until now been complacent in what appears to be a tight race, Capital Economics' chief economist for Australia and New Zealand Paul Dales said.
"The markets have been surprisingly sanguine on the election so far. It's possible that tomorrow's debate will shake things up a bit, especially if [Donald] Trump does well," he said.
Despite a New York Times poll putting Democrat candidate Hillary Clinton, at 45 per cent, just ahead of Trump, at 43 per cent, the market is only partially pricing in a Trump victory, Citi chief global political analyst Tina Fordham said. The markets have been otherwise occupied with central bank moves from the Bank of Japan and Federal Reserve in particular.
However, should Trump move higher in the polls in the lead-up to the election, market moves may be exaggerated as investors rush to reprice the risk. An 85 per cent probability of a Trump victory priced into markets could result in a strengthening US dollar, particularly against emerging market currencies, Ms Fordham said. It could also spark a sell-off in long-dated bonds and a fall on the S&P 500 by around 3 per cent as it prices in trade headwinds and the risk of recession, while gold could surge from around $US1330 an ounce to $US1400 in a flight to safety.
"Equities and bonds may weaken together," Ms Fordham said.
Westpac strategists Richard Franulovich and Sean Callow said a Clinton presidency would result in a benign outcome for US equities, because she is more of a known quantity than her opponent. "[It] may well even produce a relief rally into 2017," they said.
The benefit may not extend to all stocks, and they note financial stocks may suffer in anticipation of Clinton's reinstatement of the Glass-Steagall Act which restricts commercial banks from operating in investment banking.
A win for Clinton, and her likely pro-growth fiscal stance, would not only boost stocks but also the US dollar. But as long as the polls indicate a Trump victory is possible, risk aversion and volatility are likely to rise in the lead-up to poll day, keeping a lid on risk assets including the Australian dollar, New Zealand and Asian currencies, they said.
"There could be an initial squeeze higher in these currencies in the event of a Clinton win, if the safe-haven US dollar slips back in the immediate response.
"Volatility should be high both sides of the election almost regardless of the polls."
Capital Economics doubts, however, a surprise Trump win in November would translate to a big sell-off in shares, but if Trump's protectionist policies are implemented once he takes the oval office US equities would suffer, particularly companies with multinational earnings, Mr Dales said.
While Australian equities should be less exposed, "if there is a lurch to protectionism around the whole world, then that would hit the profits of multinational Australian companies and their equity prices," he said.
Macquarie analysts also expect the effect on Australia's economy and markets to be minimal. The US accounts for just 10 per cent of Australia's exports, mostly airline parts, meat and wine, while immigration to the US is low. They liken the unpredictability of a Trump win to a "Brexit-like event".
"The unpredictability of Trump raises the risk premium for financial assets but the reality is that both candidates represent a shift from the current political consensus of austerity and globalisation – Trump, a little more dramatically and with less qualification," the equity strategists said.
Among the policies expected to affect Australia, both Trump and Clinton have said they intend to boost infrastructure spending; however, the impacts will be diluted over a gradual roll out.
"This may potentially give an announcement day push for those exposed to building and construction [Boral, James Hardie, Reliance Worldwide and Transurban] but the earnings impact would be immaterial. It is more likely that the biggest impact will be translation benefits, it if comes with a stronger US dollar."
Healthcare policies may also weigh on local stocks. A repeal of Obamacare flagged by Trump may present downside for Sirtex Medical and Sonic Healthcare, while the creation of a free-market drug pricing policy by Trump could boost CSL.
Citi however said of the few "black swan" events that could cause market upset from a Clinton win, could be a tougher stance on big pharma.
