Global political event of the year - US presidential election on November 3 – has for long been hanging as a double-edged sword on the financial markets, regardless of its outcome.
Global equities plunged on Friday after the White House announced President Donald Trump had tested positive for coronavirus. The sudden turn of events, coming a month before the election, led some commentators to express doubts if the vote would actually take place at all.
True, the markets have already been gearing up for an unprecedentedly turbulent US election. But with Joe Biden’s lead widening in the polls and Trump’s campaign sidelined by the virus, investment strategists now say there’s less of a chance for a contested election.
A clear-cut Democratic victory could avoid a long and messy legal battle and provide certainty to markets that have been nervous about election risks, according to strategists from Citigroup to JPMorgan Chase & Co.
A poll released last Sunday - taken between Tuesday’s debate and Friday’s news of the president’s infection - found that Biden’s national lead had leaped to 14 points, from 8 before the debate. Biden also has set two records for monthly fundraising in August and September, giving him enough money to dominate Trump on the airwaves.
On the contrary, there is one scenario that could shake up the bond market the most: A clear and undisputed winner.
This is likely one of the most-underappreciated risks of the vote, with the potential to push the 10-year Treasury yield back to 1% in the weeks that follow, a level it hasn’t touched since the first quarter.
While it may not be the base case for many prominent investors, some are positioning for it just in case.
Who is, then, likely to win?
History strongly favours the incumbent: Nearly three-quarters of sitting presidents have been re-elected, looking at elections going back to 1932. Since then, an incumbent president has never failed to win re-election unless a recession has occurred during their time in office, according to a JP Morgan Asset Management report.
The race is still closer in some of the states most needed to win the presidency. The unprecedented number of mail-in ballots being cast this year because of the pandemic means it likely won’t be possible in some battleground states to declare an unofficial winner on election night.
Election officials say it could take days or even weeks in some cases to get a complete count, and a final determination could also be delayed by post-election lawsuits challenging the results.
As a matter of fact, volatility markets have been pricing in risks from the election for months now, raising the bar for bad news to hit trading.
But here’s the enduring concern.
Any financial instability that may follow the election will add to the headwinds undermining a much-needed economic recovery that is strong, sustainable and inclusive, says Mohamed A El-Erian, chief economic adviser of Allianz.
His advice: Investors need to wake up to the reality that the economic recovery will take longer to take place and they shouldn’t overly rely on US lawmakers.
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