Wall Street reacts to Trump with a shrug despite pro-business bluster

Donald Trump is running for president on the premise that his business acumen makes him the best man for the job, but reaction from the business community Tuesday suggests that's far from the consensus view.

In Monday night's presidential debate, the Republican candidate talked about things like cutting personal taxes to the lowest level seen since the Reagan administration, cutting the corporate tax rate to 15 per cent from 35 and loosening regulations on a slew of American industries.

Ordinarily, pronouncements like that would be music to the ears of a Wall Street audience. Yet the reaction to Trump's presidential run has been counterintuitive: when it looks like he might win, the markets get scared.

Tuesday's reaction was no different, as investors staged a mini "Clinton rally" once the consensus view that the Democrat had managed to out-reason her Republican foe's meandering bluster. "U.S. stocks ended higher yesterday, after traders deemed that Hillary Clinton benefited most from Monday'spresidential debate," said BMO economist Priscilla Thiagamoorthy in a note on Wednesday.

Dow and S&P futures rallied through the evening and before markets opened on Tuesday. Gold prices, which typically go up during times of fear and uncertainty, lost ground. "The tension on the gold market appears to have eased initially," Commerzbank said in a research note, "after most observers agree that the presidential candidate Hillary Clinton clearly came out on top."

Investment bank Morgan Stanley puts the odds of a Trump victory at about 30 per cent, but still advised clients in a note Tuesday that the "tail risk" of a Trump victory "cannot be dismissed" and as such investors may want to stay on the sidelines for a while.

While the bank is expecting a Clinton victory, the most likely outcome is still a Democrat in the White House with Republicans controlling Congress. Which is why the "the next president may only be able to make slow progress, if any, toward their goals," the bank noted.

Scotiabank economist Derek Holt said Clinton didn't hurt her chances on Monday, something that could bode well for the U.S. economy down the line. "Personally I thought she won the debate hands down and exhibited a mastery of the substantive issues that eluded Trump's angry persona," he said.

Regardless of who wins, in most elections investors are just hoping for stability.

To that end, Societe Generale strategist Kit Juckes put his views on Monday's debate succinctly: "The press verdict on the first U.S. presidential debate is that Hillary Clinton 'won', but Donald Trump didn't lose badly enough to really reduce the uncertainty."

Peso rallies

Currency markets breathed a sigh of relief, however, as the peso rallied more than two per cent starting from just after the debate began.

Prior to the debate, the Mexican peso had been near an all-time low of around 20 to $1 US on fears that a Trump win would slam the brakes on trade between the two countries, as the United States is Mexico's largest trading partner by far.

One Wall Street icon who was a definite loser Monday was Federal Reserve chair Janet Yellen, whom Trump accused of trying to help the Democrats by refusing to raise interest rates until after the election.

"We have a Fed that's doing political things ... by keeping interest rates at this level," Trump said. "The day Obama goes off … playing golf for the rest of his life, when they raise interest rates, you are going to see some bad things happen."

Those statements could be bad news for the U.S. economy in and of themselves, as they could be enough to compel a change at the world's most powerful central bank — something that would lead to the sort of instability that markets hate.

"Frankly the veracity of Trump's claims are irrelevant," economist Paul Ashworth at Capital Economics said. "It doesn't even matter if Trump himself believes them — if those claims are made publicly to a viewing audience of up to 100 million Americans, and a majority of those Americans then go on to vote for Trump in November's election, then what choice does Yellen have?"

Trump may not have as many backers on Wall Street as he likes to think, but ultimately his biggest problem from the investment community may not be hostility but rather apathy: they've got other things to worry about.

"While the perceived debate winner or loser might have been a factor in early equity trading," Kevin Giddis at Raymond James said, "the ... market is focused on other things, mainly concerns over certain banks, and their sustainability."

As Scotiabank's Holt put it: "The U.S. election is hardly the only thing on market minds."