Donald Trump 'discount’ hangs over Australian dollar, ASX
A Hillary Clinton presidency could make the Australian dollar worth almost 8 per cent more and the local stock market would trade higher compared to a Donald Trump-controlled White House, according to an analysis of swings in financial markets and US election betting odds.
The novel academic study co-authored by US-based Australian economist Justin Wolfers concludes a "Trump discount" threatens to rout global equities, crude oil and other assets if the businessman wins the election, including an estimated loss of about 4 per cent for the S&P/ASX 200 Index.
"Australia has a very big stake in this American election and would do a lot better under a president Clinton than a president Trump," Dr Wolfers said.
The economic research probes recent price rallies in US-paired currencies and global equities in reaction to major disasters for the Republican nominee's campaign that slashed his chances of winning the November 8 election.
When Mrs Clinton was widely judged to have beaten Mr Trump in the first presidential debate last month shares and futures markets immediately rallied strongly in the US, United Kingdom and Asia in two hours, at a typically quiet time in financial markets. Global market volatility also eased when Mr Trump became less likely to be president.
The research paper, What do financial markets think of the 2016 election?, by the University of Michigan's Dr Wolfers and Dartmouth College economics professor Eric Zitzewitz, notes the currencies of US free trade agreement partners, including Mexico, Canada, South Korea and Australia, also jumped.
The Australian dollar gained 0.48 per cent to US76.62¢ on the morning of September 27.
Combined with the Democratic nominee's chances of winning the election rising at the time to 69 per cent, from 63 per cent immediately before the debate, the economists calculate this implies the Australian dollar would be 7.9 per cent higher under a president Clinton compared to Mr Trump's leadership.
"Australia is one of the bigger movers and I think it's because of trade," Dr Wolfers said.
The economic protectionist Mr Trump has pledged to renegotiate international trade deals in favour of the US and threatened to impose tariffs on cheap imports from China and Mexico.
Mexico's peso surged 1.76 per cent during the first debate, implying it would be worth up to 29 per cent less under a president Trump, taking into consideration the change in election-winning odds.
As well as trying to reduce Mexican manufacturing imports, Mr Trump has warned he could cut off money transfers between the countries if Mexico did not pay $US10 billion to build a wall on the US border to stop illegal immigrants entering America.
The academic economists also analysed financial market and election betting responses to another subsequent election gamechanger – the leak of a recording of Mr Trump's vulgar boasting about trying to fondle, kiss and have sex with women and coming on to them "like a bitch".
They estimate market participants believe that a Trump victory would reduce the value of Wall Street's S&P 500, the UK and Asian stock markets by 10 to 15 per cent, cut the oil price by $US4 a barrel, lead to a 25 per cent decline in the Mexican peso and significantly increase market volatility.
By weighting the effect of the debate and so-called "Trump tape" the impact of a Trump presidency on the Australian dollar moderates to 4.3 per cent.
The Australian equity market rally was more subdued in reaction to the first debate, with the S&P/ASX 200 Index gaining 0.26 per cent in morning trade on September 27. That implies the effect of a Clinton win would be 4.4 per cent higher than if Trump wins, or 12.3 per cent more in US dollar terms.
Dr Wolfers was once an aspiring professional gambler who briefly worked for a Sydney bookmaker, before shifting into economics at the Reserve Bank of Australia en route to studying at Harvard University and pursuing an academic career in the US over nearly two decades.
He and partner Betsey Stevenson, a former economic adviser to Democratic President Barack Obama, wrote an academic paper in 2008 refuting the long-accepted Easterlin Paradox that income and happiness were not related.
The latest election paper argues that recent market movements suggest investors expect a generally healthier US and international economy under a president Clinton than under a president Trump.
Investors appear to prefer the relative stability of the former secretary of state, senator and first lady being in charge than the unpredictability of the real estate mogul leading the world's biggest economy and military power.
The paper suggests the markets think the US stock market is worth about 11 per cent more under Mrs Clinton than Mr Trump.
This is despite the billionaire businessman pledging to slash the corporate tax rate by more than half to 15 per cent and abolish regulation for business.
Mr Trump's negative impact on financial markets is rare for a Republican.
In almost every election since 1880 equity markets have risen on the news that Republicans win elections and fallen when Democrats win, the paper finds.
Markets rallied when Republican businessman Mitt Romney beat Barack Obama in the first debate in 2012.
"Trump is the exception," Dr Wolfers said. "The point isn't that Trump will cause a recession, but rather that markets fear that he'll do a ton of medium-run damage to the economy."
The academic analysis backs up findings from UBS Wealth Management and Citibank that investors prefer the relative policy certainty of a Clinton White House.
However, a new tail risk that has some professional investors nervous is the rising possibility of a Democratic clean sweep of Congress at next month's polls.
Such a development, while still only rated less than a 30 per cent chance by bookmakers, would allow the left-leaning party to implement its policies of extra taxes on business and the wealthy, a higher minimum wage, more employee family leave, free university, new financial regulation, pharmaceutical price controls and a crack down on oil and gas drilling.
Dr Wolfers is a left-leaning, market-oriented economist, well known in the US for his data-intensive research. His previous academic economic papers have concluded that white basketball referees called more fouls against black players and there is no evidence that the death penalty acts as crime deterrent.
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