What if Donald Trump becomes the US president? That fear sent global equity markets down, as some polls showed Trump either taking the lead from Hillary Clinton, or at least the gap between the two narrowing.
This time, it wasn’t just the Mexican peso that took a beating. As the accompanying chart shows, it was a risk-off day for markets, with risky assets such as emerging market stocks falling, while safe-haven assets such as the Japanese yen, gold and US bonds did well. (The chart shows US bond yields fell, which means bond prices went up).
But the damage so far has been surprisingly limited. Does the prospect of a foul-mouthed, misogynist, racist, trigger-happy, anti-globalization maverick becoming the leader of the most powerful economy and military of the world mean a mere 1-2% fall for global markets? What lies behind this remarkable calm?
Simply put, the markets do not really seem to believe in a Trump victory. There is no spectre of Trump haunting the markets. At least part of the present bout of jitters can be attributed to the fact that the US markets are now pricing in more than a 70% chance of the Federal Reserve raising interest rates next month.
The chart shows what happened to the markets when Brexit occurred. And Brexit was a much smaller event, given the relative unimportance of the UK economy. Indeed, the long and winding path to Brexit has given opportunities for many twists and turns for the markets.
A Trump presidency will, on the other hand, plunge the markets into much greater uncertainty. Perhaps investors would do well to buy some insurance in gold.