U.S. stock market investors are taking a Hillary Clinton victory over Donald Trump for granted, leaving themselves vulnerable to a Brexit-style surprise, analysts warned.
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Financial markets are thought to have largely priced in a Clinton victory over Republican challenger Trump. Clintons lead in most polls widened in recent weeks, though that margin had appeared to tighten ahead of the FBI news. Polls conducted in the wake of the FBI announcement have shown mixed results but no major shift.
The Mexican peso
has been getting a lot more attention than normal lately. Due to Trumps signature pledge to build a wall to prevent illegal immigration from Mexico and his hostility to trade deals, including the North American Free Trade Agreement, the peso is serving as a market-based proxy for Trumps Election Day prospects. A weaker peso is viewed as a sign that Trumps prospects are improving, while a stronger peso reflects expectations for a Clinton victory.
The peso has had a run of strength. The dollar fell 0.6% Monday to fetch 18.8574 pesos, according to FactSet, and declined 2.7% against its Mexican counterpart over the month of October.
Steven Barrow, London-based currency and fixed-income strategist at Standard Bank, sees other signs of complacency in the peso trade. He argued, in a Monday note, that U.K. markets had been far more attuned to the possibility of a shock outcome ahead of Britains June 23 vote to leave the European Union than U.S. markets are now. The pound tanked after the unexpected victory for the leave camp and remains near multidecade lows versus major rivals.
In the chart below, Barrow notes that one-month implied volatility in the euro/British pound currency pair
rose to a peak of 26.5% about a week ahead of the Brexit vote. In contrast, the peso hasnt seen its one-month implied volatility reach the same level, despite being a currency that traditionally shows much higher volatility than euro/sterling. Barrow said the dollar/peso pairs volatility should be well over 30% right now if it were to trade on a comparable basis with the pound before Brexit.
Barrow acknowledges that a Trump win isnt seen as bad for the peso as Brexit was for the pound, but said that in terms of its shock value and potential to cause intense short-term volatility, wed argue that the market is going into the election with a degree of calmness that could prove calamitous should Trump win.
Wall Street ended virtually unchanged Monday. The S&P 500
declined less than 0.1% and failed to build on the modest pullback scored at the end of the previous week after the Federal Bureau of Investigation said it would look into thousands of emails potentially related to the Democratic nominees use of a private server while serving as secretary of state.
The problem for the markets is that Clinton looks to be priced in. If Trump wins there could be some very sharp selling and investors seem to be ignoring this risk, said Adam Jepsen, founder of London-based Financial Spreads, in a note.
Jepsen, meanwhile, said investors should pay closer attention to the bookmakers, who have shortened the odds of a Trump victory. Ahead of the latest twist, U.K. betting shops had put Trumps odds at around 5-to-1 or higher, he noted, signaling a 15% to 20% chance of victory. Hes now seen at between 4-to-1 and 3-to-1, or with a 20% to 25% chance of victory. Thats roughly in line with the probability of a Trump win calculated by poll-tracking site FiveThirtyEight.com.
Irish bookmaker Paddy Power on Oct. 18 said it had decided to pay out more than $1 million in bets on a Clinton victory. At the time, Paddy Power put Trumps odds at 9 to 2, or around 18%. Now, Paddy Power, which continued to accept bets on the election, puts his odds at 5 to 2, or a 28.6% probability.
Neither Jepsen nor Barrow are calling a Trump victory likely.
But it wouldnt be a surprise if the market gets more nervous about the possibility in the coming week, Barrow said. If that happens, riskier assets like equities could be in for a fall while the dollar could rise against currencies viewed as risky and lose ground to safe currencies like the yen, Swiss franc and euro, he said.