How US presidential election outcome will impact global financial markets

An ISPOS puts the Democratic candidate Joe Biden ahead of Donald Trump with 51 per cent acceptance compared to 42 per cent for POTUS

As global financial markets await the outcome of the US presidential polls, the run up to the outcome will be marked with volatility. Most analysts say that a fiscal stimulus ahead of the poll outcome is unlikely, which will keep the markets on edge.

It now seems a big stretch to think that any deal will be reached before the elections, said analysts at Rabobank International in a recent note, who feel that the size of the fiscal package will be a key differentiator between the Democrats and the Republicans

“It seems very unlikely that the Republican controlled Senate will agree to anything other than a stimulus package around the $0.5 trillion mark,” Rabobank analysts said in a recent report.

A Democratic victory in the presidential poll, and a related takeover of Congress, according to Christopher Wood, global head (equity strategy) at Jefferies, will see pressure from the activist side of the party to embrace more formally policies aligned with Modern Monetary Theory. Such policies, he believes, would turn the US Federal Reserve (US Fed) into an instrument of fiscal policy obliterating any lingering sense of central bank independence.

An ISPOS – Reuters poll done between October 16 – 20, puts the Democratic candidate Joe Biden ahead of Donald Trump with 51 per cent acceptance compared to 42 per cent for POTUS.

Meanwhile, analysts at UBS assessed potential risks associated with the current election based on three scenarios. First, Former vice-president Biden is elected with Democrats taking both houses of the Congress. Second, is a status quo where President Trump is re-elected and the Democrats and Republicans retain the House of Representatives and the Senate, respectively. Third, Biden is elected but Democrats and Republicans retain the House of Representatives and the Senate respectively.

UBS believes markets with greater overseas revenue exposure, especially North Asian exporters, could benefit if the US adopts more multilateral and predictable trade/foreign policy (more likely under Biden). On the monetary front, markets with high yield gaps, low current account balances/deficits, and historical sensitivity to the US bond market, they believe, could benefit in an environment of easier-for-longer monetary policy.

“Stepped up fiscal spending, particularly on infrastructure, would generally favour the materials sectors, to which Australia naturally has the highest exposure. India, Indonesia and Singapore come out positively in two of the three scenarios, without being relatively negatively affected in the third. Both Indonesia and Singapore are also inexpensive versus their history relative to the region,” UBS said.