Fed rate hike expectations soar as signs point to a Clinton victory

One way to track the financial market’s feelings about the US Presidential election has been to look at expectations for a Fed rate hike in December. A win for Clinton is considered a green light for the Fed to hike rates, while a win for Trump could put the brakes on a rate hike from the Fed in the medium term.

Markets looking for a Clinton win

Markets have rushed to price in a rate hike from the Fed in recent days, the current implied probability of one 25 basis point hike next month is 82%, up from 68% a week ago. This is a sign that markets are confident that Hillary Clinton will win the US Presidential election tonight. It also suggests that should she lose the election and Trump win, there could be a major readjustment in financial markets, with Fed rate hike expectations falling sharply, a dramatic fall in US bond yields, and a decline in the US dollar.

Is it too early to put Trump’s election prospects to bed?

Although some polls on Tuesday have put Trump ahead, we prefer the reliability of the polls from Monday, with the Reuters/ Ipsos poll giving Clinton a 3 point lead. We would flag the LA Times/ USC polls in recent days that have consistently has Trump winning by a slim margin. We think this is due to a quirk in their methodology, but it is enough to stop us from writing Trump off altogether. So, while we think a Clinton win is more likely, we are still gearing up for major financial market volatility if this proves not to be the case.

What our clients think

Our clients also appear fairly confident about a Clinton win, however, this is reflected more in their FX positions than in their stock market positioning. Our clients are long the US dollar in the lead up to the election result, and 75% of clients trading USD/JPY are long. The fact that our clients are willing to short the yen at this stage, suggests that they do not see a shock election result from the US. They are also long the Mexican peso. Of our clients trading USD/MXN, 92% are short. The peso has been sensitive to Trump’s Presidential prospects, and has been rising sharply as it appears likely that Clinton will beat him to the White House. We would expect clients to start taking profit on their positions in the MXN before the election results are announced, as they may not want to carry that risk overnight just in case Trump pulls off the impossible and does win.

Stock investors less enthusiastic about who wins the election

Stock investors are less enthusiastic. After Monday’s broad-based rally, we have seen much more subdued markets on Election Day. Our clients are also wary of rushing into Monday’s stock market rally. Of those trading the FTSE100, 59% are short, while of those trading the S&P 500 68% are short. Although we expect stock markets to stage a relief rally if we see Clinton win the White House later today, we believe that any stock market rally is likely to be short-lived, as markets instead focus on the risk of rising bond yields and a Fed rate hike in a few weeks, which could be bad news for stocks into the end of the year.

We will send out commentary throughout the evening as the results emerge. We expect the Asia session to be extremely volatile as it reacts to individual state election results, particularly Florida, which is expected to announce its exit polls at 0100 GMT Wednesday. By 0300 GMT, if Clinton wins key swing states, it is likely that she will be declared the winner.