Following on from our comprehensive US Election Outlook that we published in early September, our US desk strategists have been discussing some of the main themes and expectations for the US election with a broad range of our clients within the US and elsewhere. Here are some of the main questions and our answers.
1. How have recent developments, such as the Supreme Court battle, President Trump’s Coronavirus diagnosis and the upcoming second debate, impacted the outlook?
Trump has fallen further behind in the polls, and time is running out for him to catch up. Biden is now 10 percentage points ahead in the polls, and his leads in most of the all-important swing states are increasing. We always thought this election was Biden’s to lose, and if Trump may already be out of time to make up the deficit.
Large amounts of mail-in votes have already been cast, and early indications are that these votes have been on average 2-1 in Biden’s favour (although more votes have been cast in Democrat-leaning states, so we shouldn’t extrapolate these figures). The real race looks to be for the Senate, where again the Democrats look to be doing well: Republican Senator Graham’s seat in South Carolina, a traditional Republican stronghold, is now a toss-up. Even the Republican-held Kansas Senate seat is looking closer, despite Trump having won Kansas by 20 points in 2016.
2. Do betting odds or polls really reflect the likely outcome?
The polls and the betting markets are clearly indicating that a Biden presidency is the likeliest outcome. But both the polls and the bookmakers have been wrong in the past – most notably with the Brexit vote in 2016 and, of course, Trump’s win over Hillary Clinton later that year.
And this isn’t lost on our clients – despite Biden’s sizeable lead in the polls, we felt that our clients were much more split roughly 50-50 on who’s going to win in November. Some of them just deeply distrust the polls, while others believe that Trump’s going to close the gap as Election Day approaches.
That being said, the dramatic shift in polling average in favour of Biden, and Democrats in general, appears to have shifted the consensus view meaningfully over the past few weeks. Client skepticism over Trump’s underdog status that we observed widely in September appears to have been more cemented over the past week.
3. Do you expect a contested election?
Our house view is that the prospects for an election delay or contested election are probably overstated, but there’s no denying that this is the outcome that investors are most worried about. And we have to admit that we did become a bit more concerned about a contested result after President Trump suggested in the first debate that he intended to challenge the result should he lose.
Even if President Trump were to contest the outcome of the election, we don’t believe that he’d be successful in overturning the result. But we note that volatility markets (specifically in US equities and USD/JPY) are priced relatively high for the weeks following 3 November, suggesting the markets are concerned about the prospect.
An important, if obvious, point here is that the validity of a contested election claim would likely be higher in the event of a very close race. The widening of polling averages in Biden’s favour is, as a result, a significant development.
4. How do both Presidential candidates compare on geopolitical issues?
In summary, if Trump wins the election this year we’d expect a continuation of his unilateral transactional style of diplomacy. We think a Trump win would give him a mandate to adopt a more aggressive stance on trade. Joe Biden offers a different path – a move towards, but probably not a complete return to, Obama-era multilateralism.
Most investors we spoke to agree with us that the impacts of any changes to the US’s foreign policy would probably be felt most immediately in foreign exchange markets compared to US interest rate and equity markets.
5. What’s the market impact of each potential outcome?
In our view a Democratic sweep is still the likeliest outcome of the election, and recent price actions (including shifting market views on the prospect of near-term stimulus) back up our view that risk assets may benefit from pricing in greater fiscal stimulus under a united Democratic Congress. This should outweigh the potential negative effects of potentially higher taxes and a stricter regulatory stance.
In the event of a mixed government – no matter who’s at the helm – we expect gridlock at the Congressional level to result in lower fiscal stimulus. With fiscal stimulus less able to contribute to growth, monetary policy may be forced to pick up more of the slack to support the recovering economy, which may mean lower rates for even longer and possibly even more aggressive monetary stimulus.
In the currency space, we believe that a Biden win with a Democratic sweep would likely lead to a weaker USD over time. A softer geopolitical stance, more fiscal stimulus improving US (and global) growth prospects may each benefit risk-oriented currencies vs. the USD.
For more information on how the different possible outcomes will impact the markets, read our article here.