Trading Trump

We all know the drill. Trump = risk off, at least for our EM universe.

But is there an opportunity here? How bad can it get? Even before that, will it really be bad? And later, will it come back equally fast? What about a Clinton win? Will there be a rally? How much? Could there be a Clinton sell off? What about Congress and Senate and all the permutations and combinations? Too many questions and an even greater number of answers.

This is indeed a watershed election and its ramifications will be felt for a long time to come. When the event we face is so multi dimensional it is prudent to adopt the simplest possible approach. First stick to what you know best, and second don't forget the underlying trend. In the case of India rates the basic plot has still not changed.

• RBI still has an accommodative stance.
• With almost USD 19 bln of FCNR outflows this month we will see OMOs continuing if not increasing.
• Headline CPI is scheduled to drop below 4% by year end.

So does this mean that Trump is no worry for our markets? Yes and No. Yes he is a worry because the contagion effect is very strong now. India is closely entwined with the rest of the EM space and whatever happens there impacts us as well. And No because local factors currently have a greater weight bias in terms of market reaction.

Luckily for everyone we have had a quick glimpse of the future on June 23rd. Brexit as an event has many similarities to this election except that the magnitude of the impact in this case would be a multiple of what happened during Brexit. Let us see how India markets reacted to Brexit. To get a better perspective we look at the move from June 17 to June 30.

• Nifty was up 158 points or 1.93%. Though it did fall more than 2% on the day.
• Rupee depreciated by 0.65%. It fell 96p on the event but recovered thereafter.
• 10 year (7.59% GS 2026) saw a 5 bps drop in yield. On the day it was largely unchanged.

Assuming the the US election is a 2 to 3 times multiple of Brexit, we should see a much sharper move on the news but a mean reversion kicking in thereafter. There is a possibility that this recovery might take a longer time given that we will be moving in to the year end holiday period soon after.

On the flip side we have a MPC meeting in December which is very live. There is of course the December FOMC but that seems a given what with hike probabilities now soaring to almost 80%. Though if we go by what 3 of the Fed's own primary dealers (HSBC, RBC and RBS) are saying, there may not even be a hike in December. That to my mind would have huge implications to the upside.

So how does one play this event?

IGB 7.59% GS 2026 at 6.90% has already moved up 10 bps from its Oct lows. A further move to 6.95% BEFORE the election is very possible. A Trump win could very easily see a knee jerk move to 7.05% - 7.10%. However this would not be a sustainable level given that the overall trend is dovish and the market is awash in liquidity. We should probably see the bond settling in to a 6.90% to 6.95% range until there is greater clarity on the December MPC meet.

The problem (for this market), is not with a Trump win. It is with what would happen if he does NOT win! If things go as per expectations and Clinton scampers home it might very well end up being a non event. The expected move on a Clinton win is small. At best we could see a pullback from 6.95% to about 6.90% or a tad lower - exactly where we are right now. Thus there is no real incentive for traders to go long in to the event.

The juice is in buying in to the expected sell off on a Trump win with hopes of a quick Brexit - like recovery. This would apply not just to India but also to the likes of Indon and Thailand. It would be a trade for the brave (some might say foolish), but then fortune favours the brave.......

(All views my own.)