Morning Brief – To the polls!

To the polls!

Today is Election Day in the United States with markets braced for considerable volatility expected through the rest of the week. Only around an hour ago campaigns finished with President Trump walking off a stage in Michigan, concluding his campaign in the same state as he did in 2016. It will be a long day ahead for Basement Biden and the incumbent President who himself will wait out the election from the comfort of the White House. With a whisker shy of 100 million votes cast ahead of E-day, voter turnout is expected to be particularly high. So what can we expect markets to do and when?

Given that the when is infinitely easier, albeit no more concrete, I’ll start with that! Polls will close sequentially moving East to West across the US with voting declarations likely to follow a similar pattern. Due to the usual voting patterns of the United States it should be a proper ‘oh, ah, oh’ fireworks display with Democratic strongholds in the East fading into Republican candidates in the centre of the US, before a traditionally firm Democratic turnout on the Western coast. Perhaps therefore more ‘Blue, AHH, Blue’.

Last time the successful Presidential candidate was announced around half past 7 on Wednesday morning, UK time. If the result is similarly clear cut in favour of either candidate we might expect a recurrence of this timing. However, given the additional complications associated with postal ballots and the evidence of a severely divided electorate, it could take several days longer. Indeed with both candidates reserving financial firepower to fight legal battles in the event of a disputed election result, an answer could take even longer. The result and any uncertainty will affect the Dollar and assets denominated therein with the four year term of the ultimate Presidency expected to have the greatest impact on the Dollar.

Now onto what will happen. There are two major risks to the Dollar and other financial assets: Biden vs. Trump and divided versus undivided governance. Biden is unmistakably more bearish for the US Dollar and his presidency would be expected to weaken USD for its entire duration. Biden’s persuasion towards a more accommodative stance in foreign policy will encourage global trade. This should encourage greater imports into the US, exaggerating the current account deficit.

Although both candidates have the potential to be big spenders in the economic recovery in response to the pandemic, if Biden is successful his Democratic economic policy should see the US increase its stock of debt faster than his Republican counterpart. Biden therefore should encourage the US further into a state of twin deficit, blunting the value of the US Dollar on international markets. In contrast to the Republican America First, domestically deregulatory and internationally protectionist stance, another Trump Presidency is evidently more supportive for the greenback.

If there is a divided result, however, the impact of either candidate winning will be moderated. Therefore a scenario where Biden takes the Presidency but without taking control of the Senate would not weaken the Dollar as significantly as a Democratic sweep. The same is true for a Trump win: a Republican win across government would encourage the Dollar to buck its recent downturn and set a path for a stronger US Dollar. In fact, any divided election will limit the impact upon the Dollar as it would undermine the ability of either President to pursue the very policies that define their potential impact upon the currency. US stocks enjoyed a good day yesterday amidst expectations of a Democratic sweep in the election today. The Dollar has weakened this morning undermining some of yesterday’s Dollar-strengthening defensive demand.

Discussion and Analysis by Charles Porter

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