Global markets are bracing for a highly turbulent trading week as investors assess the potential outcomes of the US presidential election on Tuesday. With the world’s largest economy on the cusp of a pivotal political shift, market participants are acutely aware of the possible ramifications on currencies, bonds, and stocks, especially with the race between Donald Trump and Kamala Harris shaping up to be one of the closest in American history.

The uncertainty surrounding the election has already begun to influence key economic indicators. On Monday, the US dollar weakened, and the yield on US Treasury bonds dropped as investors adjusted their positions amid fluctuating polls. Analysts expect significant volatility in the days leading up to and immediately following the election as financial markets grapple with the implications of either candidate’s victory.

Market Movements in Response to Polling Shifts

The dollar slipped 0.6% against a trade-weighted basket of currencies, marking a two-week low. This came after an unexpected opinion poll showed Kamala Harris in the lead in Iowa, a state that was previously considered a Republican stronghold. The yield on 10-year US Treasury bonds also declined by about nine basis points to 4.28%, reflecting investor caution as they anticipate the Federal Reserve’s next moves based on election results.

According to analysts, the evolving electoral dynamics could influence the Fed’s monetary policy decisions in the weeks to come. A Trump win, analysts say, may bring heightened inflationary pressures as a result of his potential trade policies, particularly in relation to tariffs on imports from key trading partners. By contrast, a Harris administration is expected to uphold policies closer to the status quo, providing a degree of stability.

Betting Markets Show Contrasting Predictions

Despite trailing in the majority of national opinion polls, Donald Trump has remained ahead in betting markets, leading to the so-called “Trump trade.” This trend underscores investor confidence in Trump’s pro-business stance, which they believe could benefit US stocks, Treasury yields, and the dollar in the medium term. Betting odds indicate that investors are banking on Trump’s policies to further drive inflation, potentially leading to a delay in anticipated rate cuts by the Federal Reserve.

Kamala Harris, on the other hand, represents a steadier economic approach that appeals to those who value stability. Market analysts are keeping a close eye on swing states, where the narrow margins could tip the balance of power and influence the future direction of economic policies. The closely contested nature of the election has led some investors to adopt a wait-and-see approach, choosing to limit exposure in sensitive sectors until more clarity emerges.

The Impact of Last Week’s Employment Report

The US labor market’s latest report, released on Friday, showed weaker-than-expected job growth, which could impact the Fed’s decision on interest rates. The labor market slowdown is expected to add fuel to arguments in favor of rate cuts, a decision that will be addressed by the Federal Reserve in its meeting immediately after the election. However, the Fed’s stance could be complicated by potential changes in fiscal policy resulting from the election, particularly if Trump’s proposed tariffs come into play.

The job report indicated a reduction in hiring, with sectors like manufacturing and retail struggling to maintain growth. This downturn raises questions about the resilience of the US economy, especially if additional inflationary pressures materialize under Trump’s leadership. If Harris secures a win, some analysts predict a return to pre-pandemic growth policies that could stabilize the job market without triggering significant inflation.

Investor Sentiment and Wall Street’s Strategy

With Tuesday’s outcome uncertain, financial markets are likely to experience heightened levels of volatility, especially in sectors that are sensitive to regulatory changes, such as energy, healthcare, and technology. The narrow margin in the polls and the potential for post-election legal disputes could delay the market’s response, leading to prolonged uncertainty.

According to Deutsche Bank’s analysts, this election could be one of the closest in American history. “If it’s close, stand by for a long few days,” said Jim Reid, an analyst at the bank, indicating that a prolonged vote count and potential recounts in key swing states could add to the unpredictability. Recounts and court challenges could extend the election’s influence on financial markets, as seen in past close-call elections.

Brad Bechtel, an analyst at Jefferies, echoed this sentiment, noting that the uncertainty makes it difficult for investors to formulate a reliable strategy. “More likely than not, it will take a few days to clear all the volatility, with things too close to call,” Bechtel said. He added that the best-case scenario for the markets would be a decisive win for one of the candidates, allowing investors to move forward with more confidence.

International Perspectives and Potential Global Repercussions

The impact of the US election is not limited to domestic markets. Investors worldwide are closely watching the election outcome, as shifts in US policy could have ripple effects on global markets. The dollar’s status as the world’s reserve currency and the size of the US economy mean that a Trump or Harris victory could influence foreign markets and economies, particularly in regions with strong trade relationships with the US.

The Bank of England, for example, is widely expected to make an interest rate decision on Thursday, where it may implement a quarter-point cut from the current level of 5%. Analysts suggest that the BoE’s decision could be influenced by US election outcomes, especially if global markets experience significant volatility in response to election results. If the US dollar continues to weaken, other central banks might consider adjustments to maintain stability in their currencies and economies.

UK Economic Policy and Interest Rate Implications

The Bank of England’s decision this week will also factor in recent fiscal policies announced by the UK’s Labour Party. Chancellor Rachel Reeves recently introduced a budget that includes increased government spending, which some economists fear could slow the pace of expected interest rate cuts. Investors had previously anticipated a series of reductions, but expectations have been recalibrated to a more conservative estimate of 4%, down from the previous 3.75% projection.

Thomas Watts, a senior investment analyst at Abrdn, observed that the convergence of US election outcomes and the Bank of England’s interest rate policy has created a unique set of risks and opportunities for investors. “The combination of central bank decisions and political factors could well cause fireworks for investors, aptly in a week that contains Bonfire Night,” Watts remarked, alluding to the potential for dramatic market reactions.

Outlook for Post-Election Volatility and Key Market Sectors

In the wake of the election, the outcome is expected to have profound implications on various market sectors. For instance, energy stocks may see increased activity depending on the winner’s stance on fossil fuel regulation and climate policy. A Trump victory could mean a boost for traditional energy sectors, while a Harris administration would likely prioritize renewable energy investments.

In the tech sector, companies involved in artificial intelligence, data privacy, and cybersecurity could experience contrasting impacts based on the administration’s regulatory approach. The healthcare sector is similarly poised for change, with the Harris campaign pushing for more affordable healthcare solutions, which could impact the valuations of major pharmaceutical and insurance companies.

In the near term, the financial services sector is expected to navigate significant volatility, as a potential Trump administration could lead to the continuation of deregulation efforts, whereas a Harris administration would likely enforce stricter financial oversight. Banks and financial institutions are preparing for sharp market movements, with hedge funds and asset managers closely monitoring swing-state results that could signal which sectors are likely to gain or lose under the next administration.

The Role of Fiscal Policy in Shaping Market Dynamics

Fiscal policy will also play a crucial role in shaping the US economic landscape post-election. A Trump victory is anticipated to bring about tax cuts, potentially benefiting corporations and high-income earners, which could have positive short-term effects on stock markets. Conversely, Harris has outlined plans for tax increases on the wealthy, which, while reducing income inequality, could lead to mixed reactions in the market as investors weigh the potential for reduced corporate profits.

The fiscal policies of either administration will impact inflation expectations, with implications for bond yields, especially for long-term securities like the 10-year Treasury bond. Inflation-sensitive assets, such as real estate and commodities, are expected to react accordingly, providing both risks and opportunities for diversified portfolios.

Conclusion: Navigating Uncertainty in a Historic Election

With one of the closest US presidential elections approaching, the outlook for global markets remains highly uncertain. As investors attempt to position themselves for potential outcomes, they are acutely aware of the ramifications on currencies, bond yields, and equities. Financial markets worldwide are expected to remain on edge, with heightened volatility in the days surrounding the election and possibly beyond. As the world awaits the results, investors are preparing for a week that could reshape market dynamics well into the new year.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

5th November, 2024