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Are markets predicting a surprise Trump win?

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Latest MoneyWatch headlines 01:12

Democratic presidential hopeful Hillary Clinton remains the odds-on favorite over GOP rival Donald Trump. But the gap is narrowing after Friday’s bombshell announcement from the FBI that emails discovered on the laptop of Anthony Weiner, the estranged husband of Clinton aide Huma Abedin, may have gone through Clinton’s private email server.

Trump’s average in the four-way polling race is now the highest it has been all year. And that has caused Wall Street to shift its electoral outcome predictions in key markets.

Some quick background: Analysts up and down the Street have proclaimed Hillary the “status quo” choice that will, at least initially, be bullish for stocks.

Why?

Because she’s part of the establishment and is unlikely to throw out trade deals, slam the brakes on immigration (especially for high-skilled workers the tech sector relies on) and raise import tariffs like Trump very well could. (Specific sectors such as health care and energy, would likely be hit hard under Clinton, however.)

By this reasoning, we should expect stocks to rise and fall based on the Hillary’s polling lead.

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Over the past week, some nervousness has appeared. The CBOE Volatility Index, known as Wall Street’s “fear gauge” because it measures the price of option protection against a market sell-off, has climbed for six consecutive sessions through Tuesday and is testing its September high near 17. 

Stocks were being hammered in trading on Tuesday in the wake of the release of fresh polls showing the race between Trump and Clinton is now essentially tied, a remarkable turnaround over the past week. The Dow Jones Industrial Average slid below the 18,000 level and threatened a collapse to five-month lows. Small caps in the Russell 2000 index, down 1.5 percent Tuesday afternoon, have already returned to levels last seen in July (chart above).

Some wag-the-dog dynamic is at play, as well, with studies showing that the weaker the stock market’s performance going into Election Day, the stronger the performance of the nonincumbent party’s candidate. So the fact the NYSE Composite Index has fallen nearly 5 percent since early September could bolster Trump’s chances.

Other asset classes aren’t moving yet. Throughout October, gold has cautiously climbed along its 200-day moving average, a measure of long-term trend strength, in a possible positive sign for Trump. The U.S. dollar has surged, likely more on firm odds of a December interest rate hike from the Federal Reserve rather than any prediction in the Hillary vs. Donald contest. And emerging market stocks, including Mexican shares, have been quiet for the last three months.

With just one week to go until Americans who haven’t voted yet go to the polls and all the votes are counted, markets overall are echoing the pollsters: Trump is trailing -- but the race is tightening in the home stretch.

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