How Will Markets React to the 2020 Election?
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- U.S. elections are coming down to the wire, with less than three weeks to go until November 3.
- A mixed composition of Congress could be the worst outcome for financial markets, while full Democratic or Republican control of Washington, D.C. could prove positive, regardless of specific policy outcomes.
- The coronavirus pandemic makes the 2020 election cycle and the reaction in financial markets unlike any other election cycle in American history.
U.S. election season has dawned upon global financial markets, and the U.S. presidential race is coming down to the wire. Amid a haphazard federal response to the coronavirus pandemic that has culminated in U.S. President Donald Trump himself contracting COVID-19, challenger Joe Biden finds himself up double digits in the latest polls conducted through October 13.
A second term of Trump or a first term of Biden could have significantly divergent outcomes for the U.S. economy and global financial markets. But it’s not just the presidential race that matter, it’s not just about Trump and Biden. The composition of the federal government in Washington, D.C. will be a significant determining factor in how different asset classes respond; a mixed Congress could results in years of gridlock, as seen during parts of the Bush, Obama and Trump administrations.
The global economy is showing increasing weakness and fragility ahead of the U.S. elections. The latest round of PMI readings in early-October suggested that the recovery is subsiding in parts of the developed world, mainly Europe and North America. Eroding economic fortitude exposes markets to geopolitical risks, with political threats rising elsewhere in Asia and Latin America.
The U.S. Dollar has demonstrated a fairly consistent path since 1980. But 2020 is proving anything but a typical U.S. election year, thanks in part to the coronavirus pandemic and the ensuing response by the Federal Reserve. U.S. Dollar positioning heading into the election is the focus as the near-term monetary policy path appears to be set.
The U.S. Presidential election has a historical tendency to influence financial markets as a change in leadership often brings a shift in fiscal policy. For the price of gold, there has been greater responsiveness to the macroeconomic landscape change since President Richard Nixon took steps to end the Bretton-Woods system starting in 1971. After hitting a fresh all time high above $2000/oz in August, gold prices have settled closer to $1900 in September and through the first half of October. The November election could provoke another volatile move.
US-led trade wars with China and the EU are likely to continue under Trump administration, which has struggled to make significant progress: the latest round of trade data showed that the U.S. trade deficit in September was over +40% larger than it was in January 2017 when Trump took office. Multi-layered geopolitical issues not pertaining to trade may spill into trade discussions. But a Biden administration may ease tensions with EU, despite having few articulated incentives to relieve pressure on China.
Data from the last ten U.S. Presidential elections reveals the Dow Jones Industrial Average typically climbs around an election. Still, it is difficult to attribute any equity strength to an election singlehandedly as an infinite number of themes are at play in the market at any given time. While the well-known equity volatility index (VIX) has been trading sideways for the past three months, the latest readings in mid-October show that implied volatility for equity markets is still double what it was in January 2020.
--- Written and compiled by the DailyFX Research Team
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.