The US presidential election for 2020 pitting President Donald Trump against former Vice President Joe Biden is less than two months away and its outcome is more uncertain than ever.
The US presidential election for 2020 pitting President Donald Trump against former Vice-President Joe Biden is less than two months away and its outcome is more uncertain than ever.
Markets across the globe have reacted sharply to US election results in the past and reports suggest that 10 days after a presidential election, a Democratic victory tended to be less positive for the S&P 500 and S&P MidCap 400. One hundred days after the election, a Republican victory tended to be less positive for the equity market than a Democratic win, but Barack Obama's first election win is an exclusion, which happened amid the 2008 financial crisis.
Let's take a look at how global markets could react to either of the election outcomes.
According to Societe Generale, a global financial services firm, a second term for Trump would be marginally more positive for the US equity market than a Biden presidency.
“The US election process is likely to trigger a bumpy road ahead - beware of the risk of a delayed/contested election outcome - but won't cause a disruption to the uptrend we still expect for US equities overall as the early stage of the economic cycle gets priced-in. Better to leverage the outcome through individual sectors and single stocks,” Societe Generale said in a report.
It believes that screening the different Democrat/Republican policy measures - sector by sector and stock by stock could be a more interesting way to generate medium-term returns, rather than by looking at the broader market.
What could happen if Biden wins?
The research house believes that the trade policy, less centred on tariffs and more on seeking an ally approach, would broadly benefit a region exposed to global trade and equity markets with high US revenues, so mostly Korea and Taiwan. For Japan exporters, a strengthening yen would offset the lesser use of tariffs. Technology decoupling is a national security issue, which means a return to more diplomatic norms. lt may not mean a reversal of content. Sentiment on China equities, especially on technology, could improve in the short term, especially if the Department of Commerce issues licenses for selling chips to Huawei.
Biden has said he will lift the temporary suspension on H-1 B visas. This bodes well for Indian IT services - which underperformed ahead of the previous US presidential election - an industry where the onshore business delivers higher-margin business than India operations, the report said.
What could happen if Trump wins
The renewed fiscal expansion and possibly a second tax cut depending on the composition of the Congress would favour cyclical markets, including Japan, where the research house expect a more subdued yen appreciation.
“A Trump win would mark a pause in China equity outperformance, through the CNY first, but there would also be a concern that tensions would deteriorate further. So far, the equity response to rising tensions has been muted and focused on a few stocks. That could change if China retaliates, if we see another round of tariffs hike, or if some China banks are threatened to have their dollar funding restricted,” the report added.
What if the election outcome is delayed/contested?
The possible short-term correction in US equities would reverberate for Asia equities. Under that scenario, ASEAN and onshore equities, less correlated with global equities, would outperform.
According to the analysts, the Federal Reserve will underwrite Treasury issuance, capping any significant bond sell-off and the dollar, whoever wins the White House on November 3.
A win for President Trump would trigger a short-term dollar bounce, as concerns of renewed trade conflict would cause nervousness and dollar strength.
The dollar is likely to fall sooner, and potentially further, if Biden wins the White House and the Democrats gain control of both the House/Senate in Congress.
“A shift to a more worker and less business-friendly president, whose fiscal policies are tolerated by a very accommodative FOMC, looks dollar negative, and would come at a time when the dollar has just started to fall from a very high level (it is still nearly 10% below its average level since 1976). The dollar is likely to weaken over the next two years, whoever wins the White House, but it weakens more if Mr Biden wins than if Mr Trump does, and it weakens most if the Democrats gain a clean sweep of the House, Senate and White House,” the report said.
What if the election outcome is delayed/contested?
An extended period of uncertainty, due to either delays in announcing a winner, or worse still, a contested election, would be bad for risk assets, and therefore, would not be dollar negative. The yen might have the upper hand, however, particularly if the president were to contest an outcome that saw Mr Biden replace him, according to the report.
Oil: A Joe Biden win in November's election could lead to a softening of sanctions on Iran and Venezuela, potentially allowing a portion of some 2mb/d of sanctioned crude back on to the global market. Accordingly, sentiment would send oil prices down.
The status quo on Iran sanctions, ESG/climate change and drilling would be neutral for oil prices if Trump wins the elections.
Gold: Joe Biden has pledged to reverse many of the current Trump policies if he wins the election and this could possibly remove uncertainty in markets as behaviour and policies are more predictable, which could consequently reduce demand for gold. For example, if the Biden administration took any conciliatory action on international trade, gold would drop.
Trump's actions have added to the appeal of gold as a safe-haven asset. Some things that have supported gold this year are certainly not Trump-specific. Uncertainty over China relations and the strong belief that sanctions should remain on Iran are clearly supportive of gold prices as geopolitics add to the uncertainty, according to analysts.
Therefore, Biden would be more negative for oil and gold than in a Trump re-election.
Emerging Market Currencies
If Biden wins
The report anticipates currencies of Emerging Markets (EM) underperforming in the near term after a Biden victory, as it would represent a change of White House administration (which brings with it heightened policy uncertainty), alongside lower US GDP growth implications. High-yielding EM currencies are likely to underperform low-yielding ones.
“If there is a united Democratic party-led Congress, this may result in heightened EM FX weakness in the immediate aftermath of the elections, as market participants may be more concerned by the relative ease with which a united Congress can enable a challenger president,” the report noted.
If Trump wins
Analysts anticipate EM currencies strengthening in the near term following a Trump victory, as it would represent an incumbent victory with expectations of no radical shift in US policies, alongside slightly higher US GDP growth implications. If there is a united Republican-led Congress, this may temporarily accentuate the outperformance of EM FX - both low-yielding and high-yielding currency baskets - in the immediate aftermath of elections, as there is greater certainty regarding an incumbent president's policy implementation.