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Jitters around the US presidential election have intensified recently, leading to a sell-off in equities and weaker US dollar against other major currencies. While this reversed somewhat yesterday after the latest twist in this most unusual and unpredictable of elections, the risk of a surprise outcome still remains high.

The latest polls show Hillary Clinton’s lead over Donald Trump remains significantly narrower than two weeks ago.

According to RealClearPolitics, Clinton’s lead is around two points, compared with over six points two weeks ago. Bookmakers’ odds, from Oddschecker, meanwhile still attach more than 80 per cent probability to a Clinton presidency.

The big unknown is how accurate the polls and betting odds are - market wobbles over the past week suggest that the potential for a surprise is high, not least following the chastening EU Referendum result.

Clinton continuity

A narrowing of Clinton’s lead has tended to coincide with a rise in a key financial market ‘fear gauge’, the VIX equity volatility index.

This was certainly the case recently when the FBI announced it has opened a new probe into Hillary Clinton’s emails, though it has since absolved her of any wrongdoing.

The exception was in June, when the rise in the ‘fear gauge’ was related to the UK’s EU referendum.

So a modest global relief rally is likely if Hillary Clinton becomes the next president.

She will represent more continuity and less uncertainty, which will support risk assets, at least in the near term, and lend support to a December rate hike.

In contrast, an even stronger ‘flight to quality’ would be expected in the event of a Donald Trump victory, or if the result is disputed.

Risky business

The risk premium on US assets would be expected to rise, leading to falls in the US dollar, Treasury yields and equity markets generally.

The Mexican peso would be hit particularly badly in the emerging markets, though, on the other hand, precious metals and ‘safe-haven’ currencies, like gold and the Japanese yen, are likely to rise.

The medium-term market impact of either a Clinton or Trump victory is more difficult to gauge.

Donald Trump has indicated that he would pursue a greater fiscal stimulus than Hillary Clinton, which could be ultimately positive for the economy, the US dollar and Treasury yields.

But there remain uncertainties about the details of his policy pledges and he could be constrained by Congress, which might be concerned about the prospect of rising debt levels.

Similarly, the extent to which a rally in the US dollar and Treasury yields is sustained in the event of a Clinton victory could depend on whether the Democrats win back control of Congress.

As we know all too well, the polls have been wrong before, but if their predictions prove accurate, most investors will be breathing a sigh of relief when the election result is announced on Wednesday.

By Hann-Ju Ho, Senior Economist, Lloyds Bank Commercial Banking