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Briefing highlights

  • Don’t ignore Sanders
  • Markets at a glance
  • Inflation on the rise
  • What to watch for today

Don’t ignore Sanders

This is not to comment on the politics of Bernie Sanders, or which of his policies I might embrace or find distasteful.

It is only to probe the potential market fallout of a Sanders victory in the presidential election.

And on that front, Capital Economics warns, investors ignore the Democratic hopeful's chances "at their peril."

"Although many observers believe that his policies, which could have a detrimental effect on the stock market, will ultimately prove too radical to appeal to mainstream voters, we think that it would be unwise to dismiss his chances too quickly," said senior economist Jonas Goltermann.

His comments followed the strong showing by Mr. Sanders in the New Hampshire primary.

These may be early days, and Mr. Sanders may be seen as too far on the left to beat President Donald Trump, whose own fortunes have improved recently, Mr. Goltermann said. Which is why investors have ignored the results.

This may well be folly, for two reasons.

"The first is that a similar argument was made four years ago to dismiss Trump’s chances of winning first the Republican nomination and then the presidency itself," Mr. Goltermann said.

“In the event, neither his radical positions on immigration and trade nor his personal conduct stopped him from winning both races,” he added.

“The second reason is that, while betting markets have shifted in favour of Trump recently, they do not see Sanders as a weak candidate – quite the reverse.”

Which brings you to this: "Although it is a somewhat imprecise exercise, by combining the odds of a candidate winning the Democratic nomination with their odds of winning the November presidential election, it is possible to back out an implied conditional probability of their chances of winning in a head-to-head race against Trump. On this measure, Sanders and Michael Bloomberg, a late entrant to the race, are seen as having the best chance of prevailing over Trump in November."

Mr. Goltermann believes that Mr. Sanders "looks to have the best chance" of winning the Democratic nomination. If and when that happens, markets will " have to start pricing a decent chance" that he takes the presidency.

Which could mean trouble for stock prices.

"The policies proposed by Sanders (and Elizabeth Warren, who has struggled in the voting so far) are arguably one of the clearest and most significant downside risks for U.S. equity markets," Mr. Goltermann said.

“Raising corporate tax rates and minimum wages, breaking up large banks and tech firms, and introducing national health care provisions would most likely damage the earnings of U.S. companies, especially those in the sectors singled out for the harshest measures, and therefore lead to substantial falls in their share prices.”

Bipan Rai, North America head of foreign exchange strategy at CIBC World Markets, said he has been hearing anecdotally that the potential election of Mr. Sanders is "one of the key risks" for markets this year.

But “we see little evidence of demand for hedging risk,” he said.

It could be that investors consider the election Mr. Trump's to lose, Mr. Rai said. Or that they believe Mr. Sanders can't possibly win. Or that "we're overrating the impact" of a Sanders win.

“The truth is – it’s probably some combination of all three,” Mr. Rai said.

“I’m not a political strategist but what I do know is that there has never a sustained sell-off in modern U.S. market history (of say greater 10 per cent) because person X was elected president,” he added.

“The U.S. political system is built for gridlock that will check many of the progressive impulses of a Sanders presidency. For markets, unless financial conditions tighten meaningfully, the risk of a sustained 10-per-cent-plus sell-off is low. And if the market sells off with Bernie (with no tightening in financial conditions), buy that dip in risk.”

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What to watch for today

Markets will be watching for the release of the minutes of the last meeting of the Federal Reserve.

"The U.S. central bank cut rates three times in the latter half of last year, and the institution seems as if it is content to sit on its hands for the time being," said CMC Markets analyst David Madden.

“The update should provide more detail as to why the Fed maintained rates last month, but it is unlikely to highlight any information that would suggest that policy could in changing any time soon.”