Trump Suffers Amidst Controversy

Trump’s election prospects have taken a significant knock over the last two weeks as the Republican candidate struggles to retain support in the wake of the further controversy.  Clinton’s odds have continued to increase in the wake of the second debate and expectations are for Clinton to secure her lead in the final debate later today.

Clinton is currently polling an average of 6% higher than Trump, moving up from an average of 3% ahead of the first debate. Much criticism has been aimed towards polls following the Brexit event and indeed some have pointed to the likely unwillingness of Trump supporters to register their support in polls. However, 6% is now starting to move outside of the margin for error and suggests a solid lead for the Democratic candidate

Both the US Dollar and risk sentiment continue to derive support from Clinton’s strong polling as the risk of the erratic and unpredictable Trump controlling the administration recede. A Trump win would likely lead to single – party control with the Republicans holding both the house of representatives and the senate. This would greatly increase the likelihood of Trump being able to push through higher volume reforms and more powerful policy.

Policy Incrementalism To Remain

A Clinton victory alongside a Republican majority retains a divided Government and greatly increases the chances of the American political environment retaining its current status. This divided government significantly lowers the chances of transformative policy being pushed through, especially early in the term of the new presidency. The reasons for this are that historically, presidents presiding over divided government have only managed to succeed in pushing through a fraction of their campaign plans.

If the Republicans retain the House of Representatives, they are likely to downplay the loss as simply due to the unpopular nature of Trump and not of the Republican message. This would likely see the Republicans continue in the vein with which they interacted with Obama; refraining from making any meaningful concessions to her policy making. In this respect, the policy “incrementalism” which hallmarked the Obama administration is likely to continue.

Democratic Majority Poses Small Risk

The key risks to this scenario would be if Clinton was able to unify government and the Democrats take control of the house. Although this scenario is only a minor risk at this stage, A Democratic majority would raise the prospects of increased infrastructure spending would be a positive for risk assets.

For now, it seems that Trump’s campaign has been significantly damaged with senior Republican Paul Ryan disavowing the Republican candidate just last week. However, Trump might still be able to claw back some support and narrow the gap with Clinton if he tempers his approach and sticks to the messages which poll well for him; economy and trade. If Trump can normalize his campaign, he could see positive results such as he experienced in the run up to the first poll where he was roughly even with Clinton.

However, the challenges for Trump at this stage are clear and significant.

• The controversy around Trump’s remark’s towards women will likely translate into weaker support from the female population. In 2012 roughly 9 million more women than men voted and in key swing states such as Ohio and Florida, 400k and 650k more women voted than men.
• More Republican leaders have disavowed Trump creating and perpetuating negative sentiment.
• Trump’s response to the campaign problems he has experienced has not been to temper his approach and normalize his campaign but rather to go on the attack. His offensive has been aimed at those within the GOP such as Paul Ryan and John McCain and also at external figures such as Bill Clinton. These attacks have further diluted his support

Market Reaction

Ahead of the final debate markets are clearly pricing out Trump risk premia with the Mexican Peso particularly enjoying some recovery amidst Trump’s decline. The US Dollar has now fallen back to the levels of mid-summer against the Peso as traders continue to expect further strengthening of Clinton’s lead in the wake of the next and final debate.