If you just looked at equity and bond market behaviour over the past few days, you’d never guess we had supposedly the most important US election in a generation (Chart 1). And the results aren’t even in. Yet again, the forecasters and polls were wrong – the presidential election was much closer than expected, and the Senate is likely to remain Republican.
Moreover, the alarmists expecting militia at polling stations were mistaken. Instead, the polling process has gone remarkably smoothly given record turnout and the scale of mail-in votes. Of course, President Trump is challenging the process and the results, so things could turn ugly. But for now, it seems Congress will remain split, while the presidency has switched from Trump to Biden.
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Summary
- Yet again, forecasters, pollsters and alarmists were wrong about the US election. It was much closer and more peaceful than expected.
- A Biden presidency and split Congress is most likely – this means more heavy lifting from monetary policy than fiscal policy.
Market Implications
- Medium term – Positive for EM markets, which will benefit from a more dovish Fed and more certain Biden foreign policy.
If you just looked at equity and bond market behaviour over the past few days, you’d never guess we had supposedly the most important US election in a generation (Chart 1). And the results aren’t even in. Yet again, the forecasters and polls were wrong – the presidential election was much closer than expected, and the Senate is likely to remain Republican.
Moreover, the alarmists expecting militia at polling stations were mistaken. Instead, the polling process has gone remarkably smoothly given record turnout and the scale of mail-in votes. Of course, President Trump is challenging the process and the results, so things could turn ugly. But for now, it seems Congress will remain split, while the presidency has switched from Trump to Biden.
One general lesson for us to remember is that elections tend not to have huge impact on markets. While there tend to be some immediate moves, months later, fundamentals re-assert themselves. This could especially be so with the current likely configuration of a divided government, which means no big fiscal plans. Instead, it will be back to the Fed to do the heavy lifting, which has been the norm for the past decade.
This could set up a more positive environment for emerging markets (EM), which would benefit from an even more dovish Fed. A Biden presidency would also increase certainty around international relations with China and other nations, which should support EM. In the end, the US elections may end up mattering more for the rest of the world than for the US.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)