Markets increasingly nervous about a turbulent US Election
With less than two months to go before the US presidential election, financial markets are beginning to turn their focus towards the latest polling numbers while also assessing the potential economic and market impact of both candidates. What’s further complicating matters is increasing nervousness around the potential for a disruptive and turbulent election. According to recent polls, Democratic presidential nominee Joe Biden currently commands about a 7pp national lead in the polls while the Democrats are marginal favourites to win back the Senate come November.
For financial markets, a win for President Trump would represent a continuation of the status quo: foreign diplomacy by Tweet; extreme unpredictability at senior adviser level; the use of tariffs as a policy tool and a low tax, business friendly approach to help boost US stock markets. On the other hand, a Joe Biden victory would represent something much closer to the old “normal”; more traditional communication, a foreign policy involving a more multilateral approach and a less antagonistic diplomatic style. The candidates in November’s election offer strikingly different political visions that will impact the economic path for the US economy for many years to come, but what are the key areas in the debate that are likely to swing votes?
Traditionally the most important issue in US elections is the state of the economy and 2020 will be no different in that regard. August’s unemployment rate of 8.5% may have beaten expectations, but with over 2 million permanent job losses recorded since February both candidates will need to introduce credible policies to get the US back to full employment. A key area for debate in the run up to Election Day will centre on Chinese foreign policy. Increasingly aggressive rhetoric towards China from both Biden and President Trump is to be expected on both the economy and China.
One area that could be an advantage for Democrats is their tax policy. President Trump’s $2 trillion tax cuts are mostly seen as benefitting corporations and high net worth individuals, while Joe Biden has been consistent in his commitment to getting rid of the bulk of Trump’s cuts as well as closing loopholes on capital gains. The Democratic nominee also said he plans to raise the corporate tax rate to 28%, which would raise an estimated $1.3 trillion over the next decade while the Trump tax cuts had reduced corporate taxes to 21% from 35%. Biden has proposed about USD7.5trn of additional fiscal spending over the next 10 years.
The other significant issue likely to be in Biden’s favour is the current administration’s handling of the Coronavirus outbreak. President Trump’s ineffective response to the pandemic, combined with the protests against racial injustice, has been one of the major drivers of Biden’s strong polling numbers. Hopes in the White House for a sweeping reopening of the US economy over the summer and a swift recovery have clearly been misplaced.
Looking at financial markets, the performance of the US Dollar in the months leading up to the election will be of importance. Almost two thirds of global trade is facilitated through the US currency while the value of the Dollar also has a significant bearing on the performance of US assets. Currency volatility is likely to increase in the months ahead, however there is very little consistency in how equity markets and the US Dollar trade going into Presidential elections. Following November’s result, currency markets expect the Dollar to strengthen if President Trump wins and the Republicans retain control of the Senate. For equity markets, the initial reaction is also expected to be positive; however we should remember that most analysts saw a Trump victory against Hillary Clinton in 2016 as having a negative impact on stocks whereas, in hindsight, it was quite the opposite. Markets might view a Biden presidency as less-combative on trade with Europe compared to Trump’s use of tariff threats as a bargaining tool which would be a boost for stock markets on both sides of the Atlantic.
When it comes to the potential for material economic policy changes, Congress – specifically the Senate – will hold the power rather than the presidency. The outcome of the US Senate election is therefore going to be critical if Joe Biden is to have any chance of implementing his progressive campaign promises, particularly around tax hikes and climate change. Republicans currently have a majority with 53 out of 100 seats, but given current polling there’s likely to be at least four closely contested seats. The Vice President holds the tie-breaker vote in the event the Senate is evenly split.
The result of any US Election is an important event for Global Markets; however this November’s result will have far-reaching implications given the current challenges being faced worldwide. President Trump’s first term has been anything but predictable and financial markets would surely welcome a less chaotic presence in the White House. A win for Joe Biden would mean less of a focus on “America First” replaced by a more multi-lateral foreign approach, which should be structurally positive for global growth in the years ahead, especially given tariffs were a significant driver of the 2018-19 slowdown.
One scenario, which many political commentators see as increasingly likely is a contested outcome. Given the current health pandemic, there is a view that voting by mail will likely increase substantially and Trump has led a concerted Twitter campaign questioning the legitimacy of these ballots. Voting by mail in many of the key swing states is seen as favouring the Democrats, and therefore initial counts in favour of Republicans may not be an accurate indicator of the final result. So, a base case scenario for many is that early results could see Donald Trump leading on election night but ultimately losing when all votes are counted. Needless to say, this creates the potential for confusion and legal challenges. The 2000 election, which hinged upon a tight race in Florida, had to be resolved by a Supreme Court decision five weeks after Election Day.
It’s this period of potential chaos that markets are beginning to fear the most. This could lead to losses for both equity markets and the US Dollar as some may question the fundamentals of US democracy and even the Dollar’s status as the global reserve currency. While the pandemic could have long lasting implications for businesses and markets, the result of November’s US Election has the potential to be just as significant.
Daragh Fitzgerald, Head of FX at Bank of Ireland.