A Bernie Sanders Win in Iowa Could Ripple Through Markets
(Bloomberg) -- Unlike the cookies used to lure support at the Iowa caucuses, financial-market expectations for what could be a pivotal moment in the race to the White House are only half-baked.
The state is the first to choose its preference for a nominee. So the vote could push the dollar down and stir volatility in bonds, strategists say, if the latest polls are right that votes will tip heavily in favor of Senator Bernie Sanders, a self-described democratic socialist.
Yet his prospects beyond that are far from certain, meaning there’s a vigorous debate among analysts about whether or not the result of Monday’s voting will ripple through asset prices.
Lauren Goodwin at New York Life Investments says two assumptions are deeply embedded in markets: one, that Donald Trump’s Democratic challenger is far from being decided; and two, that Trump will win a second term as U.S. president in November.
“It would be pretty hard to overstate how much the market expects a re-election scenario,” said Goodwin, who’s an economist and multi-asset strategist. Traders currently expect “the results in Iowa will be muddled enough that the Democratic candidate for the election is still a bit unclear.”
A poll released Sunday showed Sanders with a firm lead over his Democratic rivals -- including the moderate front-runner, former Vice President Joe Biden -- heading into tonight’s Iowa caucus. Michael Bloomberg is also seeking the Democratic presidential nomination. He is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.
JPMorgan Chase & Co.’s currency strategists are focused on how this tug-of-war between the progressive and moderate wings of the Democratic Party plays out as their strongest election-related cue on the dollar. They’re recommending a tactical short on the greenback versus the franc to brace for any election-related dips in the dollar over the coming months.
In their rationale, they cite a Jan. 24 report from the Committee for a Responsible Federal Budget that identifies Sanders’ fiscal proposals as adding the most to U.S. budget deficits over the next decade. The study didn’t consider the potential impact from Trump’s proposals. The Congressional Budget Office projects the federal gap will widen to $1 trillion in 2020 and average $1.3 trillion over the next decade.
Moreover, traders have been adding to positions in euro-dollar options that would benefit from a weaker greenback. They now have the most negative stance on the dollar versus the euro in more than two years.
Markets are underestimating how much volatility Iowa could create, Goldman Sachs Group Inc. strategists led by Praveen Korapathy reckon. They note that victory in this caucus boosts the winner’s odds of sealing the nomination by around 30 percentage points.
And the wider the gap in the economic policies of the two eventual candidates for the White House, “the greater degree of asset market volatility we would expect in response to swings in head-to-head polls,” the strategists wrote.
“While there are some kinks visible on both equity and interest rates options markets for both Iowa and Super Tuesday, there isn’t an elevated level of volatility priced in the intervening period or thereafter,” they said.
But Iowa is only the first post in this race. An online poll released Monday showed Sanders and fellow progressive Senator Elizabeth Warren in close competition with Biden in New Hampshire ahead of that Feb. 11 vote, with many still undecided.
And any market reaction to Iowa’s result is likely to be short term, in Goodwin’s view, as investors will set it in the context of the “ebb and flow of the election cycle,” and home in on the viability of the candidates’ platforms. “For most investors, it’s more productive to focus on policy changes for their portfolio positioning.”
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