A narrowing of the polls. An elderly and tarnished opponent. A resilient populist, who, despite every known law of political campaigning, manages to stay in contention. The world outside the United States is about to start getting its head around the fact that it is not impossible that Donald Trump could actually be elected president.
If you thought Brexit was scary for financial markets, wait for the reaction to a possible Trump victory. There would be panic, and a rapid repricing of assets across the world. Expect the dollar’s bull run to end, and the euro to stage a rally; expect a plunge in China, rippling out to the rest of the emerging markets; and expect the price of gold and every other kind of safe haven to soar. It would certainly be dramatic, and possibly ugly as well.
For the past year, most investors thought a Trump presidency was about as likely as Greece reclaiming its triple-A rating or Vladimir Putin handing Crimea back to Ukraine. Every political analyst and investment bank reassured its clients through the primaries that, sooner or later, the grown-ups would take back control of the Republican Party and agree on a more mainstream nominee.
At worst, Trump could spark a global trade war that would make the 1930s seems like a hiccup. That could only drive investors toward gold to take refuge from the turmoil.
It didn’t happen. Trump saw them all off. Then they told us that he would be easily beaten by Hillary Clinton. And yet, heading into the autumn, he is still in the race. Worse, the polls are narrowing — the UPI/CVoter tracking poll this week showed Trump taking a three-point lead. And with the latest scare over Hillary Clinton’s health, it is becoming increasingly impossible to rule out the idea of Trump actually winning in November.
And, yet, the rest of the world views Trump with horror — and to an extent that no previous nominee of a major American party has been. His mixture of protectionism and isolationism, combined with a streak of authoritarianism, plays terribly with the rest of the world, while his checkered business career, and the casual insults he fires off in all directions, strikes most people as unfitting in a political leader. No doubt Trump supporters will think the verdict of the rest of the world is unfair. That said, many Brexit supporters in the U.K. thought it was unfair that the rest of the world was so against the country leaving the European Union. That was the way it was. The same is true for Trump. Whatever Americans may think of him, the fact is nobody else regards him as remotely suitable to be the leader of the world’s most powerful country.
That doesn’t mean he can’t win. In Britain, the bookmakers are offering odds of around two-to-one on Trump making it to the White House. That seems about right. It remains unlikely, but by no means unthinkable. If it happened, how would the markets in the rest of the world respond? Here are four big moves to be looking out for.
First , and most obviously, safe havens would get a b oost. It is impossible to discern any sign of coherent policy-making from Trump. The best you could hope for from his presidency would be a series of headline-grabbing initiatives, none of which amounted to very much. At worst, he could spark a global trade war that would make the 1930s seems like a hiccup. That could only drive investors toward gold to take refuge from the turmoil. Expect it to rise in price, along with every other safe haven — the Swiss franc will be in demand as well, along with some of the alternative currencies such as bitcoin.
Second, the dollar would fall. The American currency has been on a tear for the past year, as the U.S. becomes the first major economy to raise interest rates, reflecting an economy that has recovered faster than most of its peers. Trump may think he is strengthening the American economy, but it won’t be reflected in the currency market, at least not right away. The dollar will be sold off, as the U.S. is viewed as abdicating its role in world affairs.
Third , the euro would strengthen. Just about nothing is going right for the eurozone economy right now, and a Trump presidency would only make things worse. If investors want to get out of the dollar, there is only one currency big enough to be a real alternative — and that is the euro. Despite all the problems within its own economy, it will start to strengthen, making life even tougher for its struggling manufacturers.
Finally , expect a nasty crash in China. Trump has promised what sounds like a trade war. Chinese exports to the U.S. total $432 billion, a huge chunk of its economy. It can’t find new markets for all that stuff, and certainly not in a hurry. The result? Factories will close, and jobs will be lost, and that will be catastrophic for its economy. Even worse, that will ripple out quickly across the rest of the emerging markets — and since they are the main driver of global growth, that will quickly drag down the rest of the world.
Today there is no real sign that the global markets have started taking the prospect of President Trump seriously. They certainly have not started to price it in. It is human nature not to worry about things much until they are just about to happen. As polling day starts to draw closer, then the minds of investors are going to focus on that possibility more and more, and they are not going to like it one bit.
A Trump presidency would by its very nature be unpredictable. But the one thing we can forecast for certain is some extreme market moves, and those are four big trends to watch if he keeps gaining in the polls.
About the writer:
Matthew Lynn is founder of Endeavour Press, financial columnist for WSJ MarketWatch, Daily Telegraph, and Money Week, and the author of the Death Force thrillers.