Romney win may offer solution to US fiscal cliff: StanChart

Ahead of the US presidential elections, global markets are slightly nervous and Sarah Hewin, Regional Head of Research, Standard Chartered feels once the polls are over the focus will definitely shift to the worries over the fiscal cliff. According to her, if Obama continues in office, concerns over the US economy may aggravate. However, a Republican win may bring about a straight forward conclusion to dealing with the fiscal cliff. 

Here is the edited transcript of the interview on CNBC-TV18.

Q: The markets are a bit nervous ahead of the US elections. What are you all expecting to see from the results? I know it is difficult to speculate on who would come, but what do you think will be the likely reaction if Mr. Obama or Mr. Romney were to win?

A: Once we have the presidential election out of the way the focus is going to shift very much to the question of the fiscal cliff. The view is that if there is a status quo, that is President Obama retaining the White House and the Senate in the Democratic control and the Republicans holding onto the House of Representatives, the dispute over how to deal with the fiscal cliff is likely to be more difficult to resolve and longer lasting.

Under those circumstances, there maybe a fall back in the dollar and as we get closer to the end of December, the fiscal cliff risks could really materialize and that will lead to concerns about the US economy going into recession. Under a Republican Presidency the assumption is that there would be a more straight forward conclusion to dealing with the fiscal cliff.

But, having said that, of course it may in the end result in the deficit staying quite wide. That would not necessarily be particularly positive for bonds. We could see US Treasury yields back up at that point and the dollar potentially coming under some pressure from those sort of moves.

Q: Since the US presidential elections will be the key point or trigger for tomorrow’s trade in Asia can you give us any permutations and combinations that you all have worked out if in case it is an Obama win vis-à-vis a Romney win with regards to an impact on the dollar index as well as possibly global equities?

A: Yes. Our FX strategist thinks that if there is an Obama win we will see two waves of US dollar activity. Initially, a US dollar has a bearish move on fiscal cliff concerns and the heightened worries about a recession ought to favour US treasuries. That is then followed by more of a risk bearish move as investors cut risk allocations ahead of the year end. That would provide some belated support for the dollar.

Romney's Republican win is regarded as most bullish for risk appetite near-term. It would reduce concerns over the fiscal cliff as well as support growth expectations heading into the first half of next year. Obviously, that sort of environment is more positive for Asian countries.

It would also probably raise expectations amongst market players that Bernanke could be replaced as Fed Chairman and also there is a risk playing that China could be named as a currency manipulator. Although, in the event of Romney winning, he may well not do this on his first day and he has so far been saying he would do.

Q: We have another event in the Greece parliamentary approval for the austerity measures, you think that could be a problem area or is it likely to scrape through?

A: It potentially could be problematic and the focus has been so much on the US that markets have tended to ignore what's happening in Europe. But, we are at a particularly difficult time at the moment. The Greek government has to pass a package of austerity measures.

The government has agreed to them and the parliament will be voting tomorrow evening and also on Sunday. Although it looks like the government will win, it is going to be a pretty slim margin. We have seen the junior partner of the governing coalition intent on abstaining. We may well see deflections from some of the major parties. It could end up being a pretty close vote in the end.

Q: At this point you all are estimating that if in case there is a Romney win, it would be better in terms of incremental flows for emerging markets such as India?

A: I think market expectation would be that a Romney win would see some fiscal tightening. But possibly we may well see an extension of tax cuts and that would be relatively agreed straightforwardly with a Republican Congress. And under those circumstances the outlook for the US economy might be more positive.

But having said that, we think that under either administration, there will need to be measures to tackle this fiscal deficit. Whoever comes in is going to have to deal with it and be more sensitive with the deficit early on rather than towards the end of the determined presidency.