With still a fortnight until election day, David Riley of BlueBay Asset Management, looks beyond the current polling and betting odds and instead considers the market implications associated with each of the plausible election outcomes.
Blue clean sweepIn such a scenario, the initial reaction of US equities and corporate credit markets may be negative on concerns of higher corporate taxes and regulation.
That said, if an incoming administration clearly signals that its priority is a major fiscal stimulus package, the positive boost to growth & corporate earnings could witness a quick reversal of any knee-jerk sell-off.
A more substantive fiscal stimulus than in other election scenarios would bring forward expectations for Federal Reserve 'lift-off' from 2024 to 2023 and even 2022 and bear steepening of the Treasury curve as longer-end yields move higher.
A Blue clean sweep would also likely be associated with a weaker US dollar as the Trump trade policy uncertainty premium is priced out and medium-term outlook for dollar fundamentals worsen on the prospect of widening twin fiscal and current account deficits.
Status quoShould Trump retain the presidency and the GOP control of the Senate while the Democrats hang onto the House of Representatives, the S&P 500 and credit would likely get a modest boost as concerns around higher corporate taxes and regulation under a Democratic administration are priced-out.
It is also a scenario with some moderate fiscal easing but not so much as to shift expectations around Fed lift-off. There could still be some mild bear steepening of the Treasury curve as ‘risk-off' positioning prior to election is closed out.
The US dollar would likely get a lift on renewed concerns that Trump could renew the trade war with China and threaten tariffs on other trading partners.
Biden win, GOP hold SenateA Biden victory but split Congress implies little chance of a fiscal stimulus with GOP opposition in the Senate to increased federal spending.
Consequently, there would be greater onus on the Federal Reserve to sustain recovery with further monetary easing that along with weaker growth outlook, implies bull flattening of the Treasury curve, is negative for US risk assets and renewed weakness in the US dollar.
Photo: Gage Skidmore/Flickr CC BY-SA 2.0
Red clean sweepA Republican Party 'Red clean sweep' that captures the House of Representatives as well as the Senate and presidency is the least likely outcome based on current polling but is a scenario that should not be discounted.
The administration would likely propose a fiscal stimulus package in the order of that recently proposed by Treasury Secretary Steve Mnuchin of about $1.5trn, including possible tax cuts.
The deregulation push would resume which would be viewed by investors as positive for oil and the financial sectors.
A Red wave would affirm President Trump's 'America First' foreign and trade policies. Moderate fiscal stimulus, possible tax cuts and deregulation would likely be viewed as positive for US risk assets and the dollar as well as somewhat higher Treasury yields.
But along with greater trade and foreign policy uncertainty, a Red wave would probably be perceived as negative for the rest of the world and emerging markets.
Delayed and contested election outcomeIt is likely that a final vote count from the elections will not be completed until several days after 3 November. Even with delay, markets may effectively know the outcome based on the results from key states.
But if the elections are very close and it is not possible to determine the outcome until all the votes are in and legal disputes settled, financial markets will be roiled by potentially weeks of political and policy uncertainty.
Prolonged uncertainty as to the outcome and the likelihood of a divided government would be negative for risk assets and associated with a bull flattening of Treasury curve as investors favour safe-haven assets.
The Fed, which meets on 4 November, may provide further liquidity to limit market disruption. The US dollar may modestly gain from broader 'risk-off' sentiment in global markets.
The overriding characteristic of a delayed and contested outcome to the US elections would be market volatility, some of which is already reflected in VIX futures contracts for November and December.
Volatility would only subside once the outcome of the elections is settled, after which the market converges to the election.
There are myriad polls and predictions for what the result of the forthcoming US election will be in November, from the chances of a Democratic Party 'blue clean sweep' through to the likelihood of a split Congress.
There are myriad polls and predictions for what the result of the forthcoming US election will be in November, from the chances of a Democratic Party 'blue clean sweep' through to the likelihood of a split...