State of the States: Donald Trump takes lead in US election. What investors should watch

What happened?

Results in key US states show Republican candidate Donald Trump taking a strong lead in the race for the White House. Trump claimed victory in critical swing states such as Florida, Ohio, and North Carolina, narrowing the potential path to the Oval Office for his Democratic rival Hillary Clinton. This makes him the likely winner. These unexpected developments caught markets off-guard, with risk asset prices falling and safe havens in high demand as investors recalibrated their probability of a Trump presidency. Betting markets had given the Republican nominee just a 25% chance of occupying the White House. Republicans also looked set to retain control of Congress, giving the party its first clean sweep since 1986.

We will need to wait for the final tally in remaining states for confirmation as to whether Trump can hold his current lead.

How are markets reacting?

The early indications shook Asian equities, sending the Nikkei 225 6% lower. S&P futures were down over 4%. Gold benefited from a flight to safety, rising 3.2% in Asian trading. The US dollar weakened by 2% on a trade-weighted basis, losing ground against major currencies including the yen and the euro. However, against most emerging market currencies, the dollar strengthened. The Mexican peso was the biggest loser, falling by 11% on expectations of more fraught relations with its main trading partner. It is also notable that the Swiss franc did not appreciate strongly against the euro, suggesting that the Swiss central bank is successfully preventing excessive strength.

The yield on the 10-year US Treasury fell 12 basis points to 1.7%. This reflects market concerns that a Trump presidency would herald a period of greater uncertainty in US policy. Some investors have raised concerns that his election would mark a deterioration in global trade relations, and that a promised clampdown on illegal immigrants may cause the US labor force to contract.

Markets are already shifting their central bank policy expectations to account for potentially higher US policy uncertainty, and elevated market turbulence. The market-implied probability of a December rate hike by the Federal Reserve fell below 50%, from around 82% on the eve of the vote.

What are we watching?

It is too early to call the outcome. But if key states continue to swing for Trump and he becomes the next US president, we will be looking for:

• A weak open for European and US equities, accompanied by a continued flight to safe assets.
• US defense companies to outperform the wider US stock market at the open, as we believe a Trump administration will boost US military spending.
• US managed care providers in the healthcare sector, to suffer, as Trump has promised to work on repealing the Patient Protection and Affordable Care Act (known as "Obamacare").
• Mexican assets to lose further ground after a 11% decline of the Mexico peso against the US dollar in Asian trading. We expect the Mexican currency to decline further against the USD, and Mexican equities to underperform emerging market equities overall (MSCI Emerging Markets). A full 80% of Mexican exports are US bound, and 98% of remittances come from Mexican workers in the US. Trump's proposed curbs on immigration and trade may weaken these important economic ties.

We will provide further details once the final results are released.

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