The separation of politics and economics is taken for granted by many, and that makes this current period so frustrating.   Investors, perhaps like many voters, just want to get the US election over with already. And yet this is a democratic moment, for all its warts and frailties and flaws.  What has unsettled the markets is not that there are two flawed candidates. Rather investors had grown comfortable with the idea the Clinton was going to win, and last week’s announcement by the FBI has made them doubt this.
In this context, the risk is the product of the credibility of a threat multiplied by the capability. Investors know that regardless of their personal feelings, Clinton is a known quantity. Trump simply is not. This is not a slight. Agents of change are by definition more hostile to longstanding practices that have become a tradition. As recently as mid-October, Nate Silver’s fivethirtyeight.com gave Trump a 1 in 9 chance of becoming President. Over the past two weeks, and importantly, beginning before, but accelerating since the FBI’s announcement, the odds of a Trump victory have tripled.
A Trump presidency has gone from highly unlikely to possible. Generalizing while acknowledging exceptions, investors have reduced risk.  In the currency markets, this means an outperformance of Swiss francs and Japanese yen. Gold rallied.
Bottom pickers were already emerging in sterling, and although its gains are lackluster, it has stopped falling. The Mexican peso has been particularly hard hit, and the local market holiday on November 2 did not help matters.  But here too the peso had begun weakening a few days before the FBI revelation. The sell-off in global bonds was arrested, while equities lost ground, though Europe’s Dow Jones Stoxx 600 sold off each session last week.
Many are trying to guess how the markets will respond if Trump wins next week. While part of the price action reflects the market is discounting this possibility  On an actual victory, it seems reasonable to expect a magnitude of the same.
