Wall Street settles in for protracted election

WASHINGTON (Reuters) - Wall Street sized up its options on Wednesday in a drawn-out U.S. presidential election campaign likely to pit a Republican with a history of breaking party ranks against one of two Democrats clamoring for change.

Traders generally dislike surprises, which can be expensive for those who bet heavily on the wrong outcome, so Arizona Republican Sen. John McCain’s strong showing in the “Super Tuesday” 24-state primary contests was welcome news.

Democratic Sens. Barack Obama and Hillary Clinton remained neck-and-neck in their race to represent the party in November’s election.

“I expected to see a knock-out punch by McCain on the right, and by Hillary on the left,” said Chip Hanlon, president of Delta Global Advisors in Huntington Beach, California.

“We’re seeing McCain has gotten enough done to sew this up in the next few weeks, but the Democratic race must live on,” he said, adding that there was an outside chance that, for the first time since 1968, the Democrats’ nominating process may drag on until the national convention this summer.

Market reaction on Wednesday was likely to be overshadowed by a more pressing issue, namely the status of a deteriorating U.S. economy that is dangerously close to a recession. Recent data showing that the services sector contracted and the U.S. economy shed jobs in January compounded worries that the next president will have to grapple with serious economic pain.

U.S. stocks were expected to open higher, recovering some lost ground after Tuesday’s bruising session which saw the worst drop in nearly a year.

NO NEW TAXES?

For many investors, it was unclear which candidate would best serve Wall Street’s interests.

While markets tend to prefer Republicans because of their history of supporting tax cuts and a hands-off approach to regulation, McCain was a somewhat different story. His reputation for independent thinking, which has won support among many voters, left some investors a bit lukewarm.

“With John McCain, the market is a little circumspect due to his voting against both of the Bush tax cuts (in 2001 and 2003),” said Andrew Busch, foreign-exchange strategist with BMO Capital Markets in Chicago.

McCain has said that he would veto any tax increases if he were elected.

Goldman Sachs economists noted that McCain had consistently polled better against Democrats than any of his Republican rivals had, so his nomination may bolster the party’s chances of victory in the November election.

However, they said that some sectors of the economy that might be expected to benefit under Republican control, like pharmaceuticals, managed health care, tobacco, and carbon-intensive industries, “might not enjoy as benign a political and regulatory environment under a McCain administration as they have under the Bush administration, judging from McCain’s policy stances while in the Senate.”

UNCERTAINTY OVER OBAMA

BMO’s Busch said investors were not sure what to make of Illinois Sen. Obama, who has pledged support for raising capital gains and dividend taxes -- anathema to Wall Street.

“With Hillary Clinton, what you see is what you get, so there is more certainty for the markets. However, most of that certainty is bad,” Busch said, pointing to the New York senator’s support for allowing many of Bush’s tax cuts to lapse and her plan for government-led universal health care.

Goldman Sachs noted in an analysis to clients that Clinton had polled worse than Obama in hypothetical match-ups against a Republican candidate. “Her nomination could lead to a closer-than-expected general election campaign,” it said.

Many Asian investors made clear that for them the candidate was less important than the party that eventually won the White House. They worried that Democrats would be more aggressive in rewriting trade deals and putting pressure on China to lift the value of its much-maligned yuan currency.

Many Democrats have expressed concern that China was intentionally keeping its currency undervalued, giving it an unfair trade advantage. They have also pushed for more worker and environmental protections in trade deals.

“Democrats are generally more protectionist and more prone to China-bashing,” said Tim Condon, head of Asia research at ING in Singapore. “They will probably be the bigger ones calling for more aggressive yuan revaluation, while Republicans just continue the current policies.”