If you run a brokerage and haven’t been paying attention to the U.S. elections, its about time you started. If you're a trader, take note of the below and prepare accordingly. The latest batch of polls in the aftermath of the FBI’s reopening of an investigation into Hillary Clinton’s email handling has thrown the presidential race back into a dead heat. Brokers are already taking action to increase margin requirements for their clients.
Earlier this year, Brexit polls have shown the world that it is very difficult to give an accurate prediction about close election results. The U.S. electoral structure is a fairly complex one. Due to the system of electoral votes, where candidates are competing for control of each and every state, the accuracy of the popular vote polls rarely gives the complete picture to the audience.
The popular vote can be fairly close, but the electoral vote can mean a totally different outcome. Back in 2000, presidential candidate Al Gore lost the race to George W Bush despite winning the popular vote (remember that Florida votes recount?).
With the decline of poll accuracy and the rise of unpredictability, some statisticians have resorted to a different approach when it comes to polling. We have come into the era of so-called polling data aggregators like baseball afficonado and statistician Nate Silver’s FiveThirtyEight.com and former option trader John McIntyre’s RealClearPolitics.com.
Donald Trump has a one in three chance of winning
According to FiveThirtyEight’s electoral map Hillary Clinton has a 67 percent chance of winning the election. Donald Trump’s chances have doubled in recent weeks, especially in the aftermath of the latest batch of news from the FBI last Friday. A one in three chance to win the U.S. presidential race should ring alarm bells for brokerages.
FiveThirtyEight Election Forecast, Source: FiveThirtyEight.com
Those who still haven’t taken measures to protect themselves and their clients from excess Volatility have little time to do so. The main effect on the markets is likely to be felt via the equity markets and precious metals. While FX markets will be certainly affected, the moves are likely to be ordinary as the exit polls data starts to flow in.
Traders of CFDs on indices and shares are the most exposed and if brokers don’t demand additional collateral for positions around the election, they might be in for a rough ride on election night.
If anything, the Brexit event earlier this year has proven that additional collateral requirements are not only good for protecting brokers, but also for protecting clients from excessive risk taking.
What do Pennsylvania, Virginia, Colorado and New Hampshire have in common?
Chicago-based RealClearPolitics, which was founded by former options trader John McIntyre and former advertising agency account executive Tom Bevan. The website is displaying a map of battleground states, which are the most important for winning the election. So to answer the question above - Hilary Clinton is hinging on not losing any of the above states.
RealClearPolitics Election Map, Source: RealClearPolitics.com
Should any of these states fall to Donald Trump, he would become the more likely candidate to win the election. That is assuming of course that the other battleground states on the map above are all won by The Donald.
As election night coverage starts, traders and brokers should be looking at battleground exit polls rather than the national average. Crucial information will also be coming from Florida, North Carolina, Virginia and Nevada.
Volatility Warranted Whoever Wins
In the end the foreign exchange and the equities markets are already starting to price in a tighter race. With current mood reflecting the chances of Donald Trump to win the presidency, the resulting batch of uncertainty is driving equity indices, the U.S. dollar and curiously, the Mexican peso lower (remember that border wall?).
Brokers and traders are likely to get the volatility that they crave, however adequate preparations need to be undertaken in order for all to capitalize on this market opportunity. The days of Brexit and the Swiss National Bank are too close not to remember and in financial markets safety should always come first.
