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U.S. Presidential Election Impact on Markets: Initial Reaction

Forex Tips by Forex Tips
November 6, 2020
in Forex News
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S&P 500 Index Dictated By Coronavirus Relief Bill Talks, FOMC Rate Decision
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The dust is still settling around the US presidential election, But the results are trickling in and we are beginning to have more certainty about what the next few years will look like in Washington DC.

Democrat Joe Biden appears poised to take Pennsylvania, which will put them over the top to secure the necessary 270 electoral votes to become the next president of United States. While the races in Georgia, Arizona, and North Carolina remain too close to call, securing Pennsylvania will give Biden the necessary electoral votes that make these other states simple window dressing.

While the results of the US presidential election may not be surprising given where the pole stirred in the days ahead of the vote on November 3, races elsewhere around the country certainly surprised. There was no blue wave.

In fact, Democrats failure to take control of the Senate and their losses in the US House of Representatives suggest that a robust fiscal spending plan to reshape the US economy in the wake of the coronavirus pandemic is highly unlikely. Election cycles moving forward or less favorable for Democrats. Given the shifting demographic trends and seats that are up for election the next few years, Democrats may have lost their best shot to retake the Senate until 2028.

Here are our initial three conclusions about the US presidential election and its impact on FX and financial markets moving forward.

Conclusion 1) With Republicans maintaining control of the US Senate, we may be entering a period of gridlock in Washington DC akin to what was experienced under the Obama administration from 2010 until 2016. Split control of Congress, In recent years, has produce a little by way of meaningful fiscal policy. It is such the case that we will see monetary policy remain dominant over fiscal policy; it is likely that we see the feds policy of low rates linger for longer than what’s currently anticipated. Furthermore, but for a one off Covid relief deal at the start of the Biden administration, it seems highly plausible that Senate Republicans, after running up the largest non-war non-recession deficit in US history under the Trump administration, will all of the sudden Rediscover Their fiscal hawk feathers. Given the run up of the US debt and deficit during the coronavirus pandemic, It would not be surprising if Senate Republicans begin to push for austerity and discussions begin to swirl once more about the US credit rating.

Conclusion 2) While this may not be the most Bullish outcome for Financial markets, in so far as a Bluewave would have likely brought more substantial fiscal stimulus, it is still seen as a positive development for risk assets in the near term. The US dollar has struggled as real yields – The difference between nominal treasury yield and inflation expectations – have turned lower. Precious metals like gold and silver, alongside equity markets, have turned higher. But such reactions, at least in the affect space, may prove short-lived. Rise in COVID-19 case numbers, no meaningful progress towards widespread vaccine deployment, And struggling state and local governments deprived of tax revenues suggest that more economic pain for the US economy may be ahead, particularly in Q1 2021.

Conclusion 3) Given the prospect for gridlock in Washington DC and the regime of lower rates for longer, the outperformance by tech stocks in the coronavirus era seems poised to continue. The forces of disinflation will remain prominent over inflation. To this point, the structural forces that have led to the political division in the United States have not been resolved and the economic forces that have led to such political divisions look like they are entrenched. For all the hubbub about the 2016 election and pulls not accurately capturing the mood of the American electorate, the 2020 results relative to the polls suggest that there is still a large swath of the population who is being ignored or discounted When market observers make investing or trading decisions based on political outcomes. This goes to for betting markets which prove manic and reactionary around early results. This is not just a case in America, but also in the UK, where we’ve seen the polls consistently underestimate the performance of Boris Johnson and the popularity of Brexit. This leads us to the necessary conclusion that more political driven volatility will impact markets moving forward; uncertainty remain supreme.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist





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