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Donald Trump's Effect On The Financial And Commodity Markets

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The word "trump" has always held significant meaning. In cards, it outranks all else, and in life, it is used to show that you have an advantage over others.

As a surname, Trump is of English origin and has historically served as an occupational name for a trumpeter (from the Middle English word "trumpe," or "trumpet"), an apt description for Donald J. Trump if you think about it. Since announcing his candidacy on June 16, 2015, Trump and his stances have taken centre stage both in America and abroad.

Despite the criticism that invariably follows his comments, his campaign is no longer a political diversion. Simply put, he has a very real shot at the presidency. But should anybody be surprised? Like him or not, the man is savvy. He is adept at connecting with the masses, and the nicknames he gives his opponents stick (i.e. "Lying Ted" and "Crooked Hillary"). While some may debate the appropriateness of his morally-grey strategy, his appeal to a wide range of Americans is no longer at question - whether you personally agree with his perspective or not.

It is difficult to gauge the effect that a Trump win would have on the financial markets given his reliance on rhetoric, and his lack of a decisive policy or plan at this time. The degree of uncertainty he has introduced to the world is high, and the domestic and international upheaval it may create is concerning. As a result, it is highly likely that the ongoing volatility experienced across both the financial and commodity markets will continue for quite some time, and may even intensify.

In the long list of market unknowns, Donald J. Trump and the US Presidential race is the unknown. The result of the election could have massive implications on the markets, even if we are unsure about what they are. When looking to commodities, a weaker US dollar will drive prices higher, but this may be offset by concerns over a slowing economy.

When broken down by subgroup, Trump could have the following effects on the markets:

  • Given the recent multi-year rally and an artificially low CBOE Volatility Index level, equities will likely experience significant volatility.
  • Precious metals will likely remain positive, reflecting heightened uncertainty and geopolitical risk.
  • Many investors could become bullish on industrial metals if Trump wins, as it is expected that he would call for increased spending on infrastructure.
  • In terms of agriculture, prices of vegetables could rise if strict immigration policies affecting illegal workers are implemented, while grains will likely remain unaffected.
  • Energy prices could go either way, depending on Trump's protectionist agenda and political policies.

While energy is hard to call, I believe that Canadian oil would do well under Trump given his desire to secure a safe supply for America, and his pro-pipeline agenda. While he wants America to be energy independent, a Canadian supply of crude would be looked at favourably when compared to other sources.

Moving away from Mexican and other South American heavy sour crude suppliers would provide advantages beyond safety and ethics. Pricing for these imports are not generated by transparent, open market systems, but rather set by their respective governments. As such, risk mitigation tools like hedging are simply not available to market participants as they are with Canadian oil.

Generally speaking, you can only use a trump card once, and often as a last resort. Donald Trump has a very real shot at being elected because many voters see him as exactly that -- a last resort. He has only one chance at this. Like Ross Perot, there will likely not be another run. While we all recognize Donald is good at blowing his own horn, the real question should be whether his candidacy heralds significant change for the world's commodity and financial markets.

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