9 December 2019 (closed)
USD/IDR (14,037) -57.00 -0.40%
EUR/IDR (15,593) -28.80 -0.18%
Jakarta Composite Index (6,193.79) +6.92 +0.11%
On Tuesday 8 November the people of the world's largest economy will vote for their next president. According to the latest polls the race between Hillary Clinton and Donald Trump is too close to call. This is the reason why we saw the global selloff last week: markets had already priced in a Clinton victory (who was leading the polls earlier) but when polls started to suggest a rather tight battle, many investors turned to safe haven assets. In the coming days investors will remain focused on the US presidential election.
There are several possible scenarios with regard to the US election on Tuesday (08/11) and its impact on global financial markets, including Indonesia's benchmark Jakarta Composite Index (IHSG) and the rupiah exchange rate.
Firstly, a Hillary Clinton victory is expected to give rise to a strong relief rally. Based on the risk appetite that was seen across the globe when Clinton enjoyed a strong lead in the polls, we can conclude that Clinton is the market favorite. Investors see her as the safe status quo with a more-or-less known agenda, while Donald Trump is the more controversial option (although Clinton's email case is also a source of controversiality). In case Trump would become president it is unknown what affect this will have on the direction of US economic policy, free trade and geopolitics. Uncertainty is investors' enemy.
The second scenario is a Trump victory. This is expected to give rise to a strong - yet temporary - selloff, perhaps even the worst since the financial crisis in the late 2000s (especially the Mexican peso would become a victim in this scenario). Simon Johnson, former chief economist at the International Monetary Fund (IMF), warned that a Trump victory could trigger a global recession and his (possible) protectionist policies could cause a new "Great Depression" in terms of the impact on trade and consequences. Trump could decide to impose big tariffs on imports from China, the world's second-largest economy. This could curb China's GDP growth by a couple percentage points over time. Meanwhile, a major effect on financial markets will also affect the Federal Reserve's monetary policy.
The third scenario is an extended process of (re)counting. A close gap between both candidates in the US presidential election could mean that the outcome is not accepted by the losing party. We saw this third scenario in the 2000 US presidential election, a battle between George W. Bush and Al Gore. The outcome of this election was not known for more than one month after balloting. This scenario would surely give rise to a selloff as investors hate uncertainty.
US stocks continued their persistent retreat ahead of the US election, falling for a ninth straight day, or, its longest period of decline in more than three decades. On Friday (04/11) the Dow Jones industrial average fell 0.2 percent, the Standard & Poor's 500 index lost 0.2 percent, while the Nasdaq composite declined 0.2 percent.
Oil Pressure Under Pressure
Meanwhile, there is more uncertainty going on in global financial markets these days. Oil prices have also been a burden and source of volatility. Over the past week oil prices fell approximately 8 percent, the sharpest weekly decline since January 2016. This weak performance is caused by higher US inventories and evidence of discord between Organization of the Petroleum Exporting Countries (OPEC) members. Markets have also become skeptical whether an oil output cut deal can be reached before the end of November. Problematically, Iraq and Iran are both looking for an exemption from production cuts. Amid this ongoing uncertainty crude prices remain vulnerable.
The Anti-Ahok demonstration that was staged last Friday (04/11) in Jakarta ended in clashes between protestors and police. There are reports that twelve people were injured and one person died. Prior to the demonstration investors were concerned that the demonstration could cause some damages or even some political instability as the rally involved thousands of hard-line Muslims. However, up to the evening (18:45 pm) everything went peacefully and therefore investors' risk appetite improved. On Friday, the Jakarta Composite Index was one of the few benchmark indices that ended in positive territory (the local bourse closes at 16:15 pm). Hours after markets had closed there did emerge violence in Jakarta and therefore this event has not been digested by the market. Although everything has been under control since Saturday morning, the clashes could be an additional reason - amid the high degree of current uncertainty - for investors to seek safe haven assets.
All in all, there is plenty of reason for investors to be cautious on Monday (07/11) with various sources of uncertainty.