2020 US Elections: Potential market implications across four possible outcomes – TDS
Not only does the outcome of the Presidency matter for the market, but also who controls the House and Senate. Economists at TD Securities analyze four scenarios and its implications for financial markets.
Key quotes
“Status Quo – President Trump, Republican Senate, Democrat House: This may be a small positive for risk assets since the election uncertainty will be over and there may not be big policy changes ahead. We can see an infrastructure plan taking form under this scenario and a bear steepening reaction in rates due to supply pressures on the long end. We believe that the Fed will prevent long end rates from rising too much beyond that with their recent pivot of asset purchases from market functioning to term premium. For FX, we think the USD would lack leadership. We would expect to see a continuation of friction with global international trade (China in particular) and that might be a source of greater uncertainty with Trump no longer up for re-election.”
“Split Government – President Biden, Republican Senate, Democrat House: The Senate remaining Republican suggests that significant policy action is unlikely. We believe that the risk market reaction might be marginally positive with the election uncertainty over and a blue sweep avoided. For FX, we think markets might take a shine to President Biden and revive or inspire confidence in a global recovery. We think the pro-cyclical nature of EUR/USD might be the bigger beneficiary here and affirm confidence in global equity outperformance that leaves the USD vulnerable to closing its longstanding valuation gap.”
“Blue Wave – President Biden and Democrat Senate and House: This should be a significant negative for risk assets since the Democrats will have a clear mandate, prompting fears of unfriendly business policies, higher corporate taxes, and higher personal taxes. We can see a risk-off move driving a bull flattening in the Treasury curve. With front-end yields pricing in no hikes until the end of 2024, long end yields could decline to historical lows of 30bp. However, we don't see 10s declining below 30bp since the Fed is highly unlikely to take policy rates negative. For FX, we would look for the USD to reassert itself with risk dynamics.”
“Red Wave – President Trump and Republican Senate and House: This scenario could actually prove modestly negative for risk despite the perception that Republicans are more business friendly. Trade tensions may escalate further and the focus on Tax Cuts 2.0 may take the focus away from an infrastructure plan. We can see a small bull flattening reaction in rates. For FX, we think more trade disruption could be particularly problematic for global trade order. If anything, we think we could see more destabilization on this front. That could be more disruptive over time and accelerate diversification efforts away from the USD as a reserve currency as US exceptionalism could be confronted in a material way. That is more of a long-term prognostication however. Before then, the USD might be more linked with the performance of US risk assets.”