Markets brace as volatile US election enters final stretch

On Tuesday night, US president Donald Trump and his Democratic Party challenger Joe Biden will square off for the first of three presidential election debates ahead of November 3 when Americans head to the polls in what is shaping up to be possibly one of the most volatile and contested elections in the country’s history.

The circumstances surrounding the 2020 vote are in themselves exceptional, with the coronavirus pandemic meaning a larger proportion of US voters are likely to vote by mail than ever before, slowing ballot counting and potentially meaning the final results could not be known until days after the polling booths close.

Global markets are, perhaps expectedly, unnerved by anything other than a clean result on election night, with the pandemic, protests and the escalating trade war with China all providing pressure on equities. A disputed and perhaps violent argument over the result of the US election could serve to irreparably damage the recovery many stock markets have seen following plunges earlier this year as the pandemic took hold.

“The only thing the market wants is to get the election out of the way”, said Neil Wilson at Markets.com, although he added that aside from a protracted period of legal disputes following the vote, any post-election volatility will “eventually be forgotten once it all shakes out”.

“Veiled threats by Trump to not accept a Biden win are probably over-analysed. The Supreme Court (and Secret Service) would see to that. It turns out the most antagonistic election in a generation for the people of America might well end up merely a short term ripple when it comes to markets, given everything else they have to contend with in the long term”, he added.

Wilson continued, saying that while a Biden win could result in a “tougher” tax policy for Wall Street, trade and monetary policy may be easier. However, with huge uncertainty around the outcome at this juncture, he cautioned that it is “currently difficult to put a price on any outcome, which in turn makes it hard to trade the election per se”.

“Going long or short based on the outcome is far too simplistic and you could just as easily call it wrong as get it right. What we can say is that the pandemic, the economic recovery and the monetary policy response are longer term going to matter much more. And so, all else being equal is far too simplistic a view to take in what’s a very complex situation”, he said.

Democrats at an advantage to take Senate on election night

While most eyes will be on the presidential race, equally important votes will be conducted to decide the composition of both the US House of Representatives and one third of the US Senate, with the former currently controlled by Democrats and the latter by Republicans.

In a note on September 25, analysts at Danske Bank said the Democrats were “slight favourites to secure the Senate” at a 56% likelihood, as the party is currently leading in four of the seven toss-up races, although they will need to win five of the seven contests to secure a majority in the chamber.

Danske said forex markets are likely to be watching the outcome of the Senate races closely, as a victory for either party in the presidential race and majorities in both houses of Congress will likely increase the chance of expansionary fiscal spending from the federal government.

“Both presidents are expected to pursue an expansive fiscal policy with a win in the Congress and our assumption is the Fed would welcome such, thus adding to [euro] upside. The tail risk for a stronger [US dollar] is either Trump pursuing tariffs, whereas Biden could potentially choose to pursue heavy tech regulation”, the bank said.

Danske analysts also highlighted that a continued stalemate in US politics, with different parties controlling the presidency, the House and the Senate, will be a “downside scenario” for the foreign exchange markets.

Story by ProactiveInvestors