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US Presidential Election Impact on Markets: Initial Reaction

US Presidential Election Impact on Markets: Initial Reaction

2020-11-06 19:50:00
Christopher Vecchio, CFA, Senior Strategist
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US Elections Reaction Overview

  • Democrat Joe Biden wins the presidency, but Republican control of the Senate means gridlock is back in Washington, D.C. Further, Democrats may have lost their best shot at controlling the Senate until 2028.
  • A robust fiscal spending plan is unlikely to emerge as was hoped for as a result of a 'blue wave,' which didn't happen. In fact, Democrats lost seats in Congress. Austerity may come back on the radar, as too may the US credit rating after a pre- and post-pandemic spending binge.
  • Much like during the Obama years, monetary policy will remain dominant over fiscal policy.
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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, D.C.

Democrat Joe Biden has won Pennsylvania, putting him 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 gives 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 polls sat 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 are 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.

Read DailyFX's full coverage of the US presidential election.

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

Conclusion #1: No Blue Wave Means No Big Fiscal Stimulus

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 produced 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 Fed's policy of low rates linger for longer than what’s currently anticipated.

Furthermore, but for a one-off COVID-19 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.

Read more: Trump Vs. Biden on Economies and Markets

Conclusion #2: Monetary Policy Dominates, Winter is Coming

While this may not be the most bullish outcome for financial markets, insofar as a blue wave 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.

Performance of DXY Index, Spot Gold (XAU/USD), US Treasury 10-year Yield, S&P500, and NASDAQ Since Election Night (Chart 1)

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But such reactions, at least in the immediate aftermath of the election, 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 Q1'21.

Read more: How to Trade the Impact of Politics on Global Financial Markets

Conclusion #3: Political Uncertainty Lingers, Polling Unreliable

Given the prospect for gridlock in Washington, D.C. 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.

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For all the hubbub about the 2016 election and polls 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 too, which proved 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 remains supreme.

Read more: How Societal and Economic Crises Impact US Presidential Elections

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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