The most likely result from the US election is a contested result where neither side will accept a loss, and a period of uncertainty and financial market volatility will follow, according to Saxo Bank’s Chief Investment Officer, Steen Jakobsen. Speaking during an online briefing session hosted by Saxo Bank, and featuring both Jakobsen and Head of FX Strategy John Hardy, Jakobsen emphasised that he doesn’t believe that the election result will make a substantial lasting difference to the US economy or stock market, but that there is a risk of market volatility in the scenario where the election result is contested.
He noted this is undoubtedly the most contested election in history but regardless of whoever becomes President after November 3 it will make little difference to the financial markets as both candidates will continue the trend towards a K-shaped economy where high-income jobs come back and grow, while middle- and lower-income jobs decline. If neither side is accepting a loss, we may experience a period of uncertainty between the election date on November 3 and the inauguration day on January 20 which could lead to market volatility, but the longer term outlook remains broadly the same.
If neither side is accepting a loss, we may experience a period of uncertainty which could lead to market volatility
Jakobsen explained that both candidates are likely to support but not stimulate the economy, and Biden’s proposed higher capital gains tax could pressure the stock market at a cost for the S&P500 of around 10% on earnings. Under Trump, tax cuts are expected, but international relations may suffer, said Jakobsen. He also predicted fiscal expansions will rise under both Biden and Trump, with the Federal Reserve and monetary response to be more K-shaped.
The two fundamental risks to this market flagged by Jakobsen were higher volatility and higher inflation, and he expects both risks to become reality. High volatility is likely to emerge due to market inefficiency, a lack of any real reform, regardless of the Presidential winner, a lack of price discovery and the emergence of the K-shaped economy. Higher inflation will be seen because consumers are spending less on travel and holidays during the pandemic, and more on consumer goods. We are seeing monetisation of debt with central banks buying government-issued debt, and we are creating a moral dilemma whereby a virtuous support cycle is producing bad policy.
High volatility is likely to emerge due to market inefficiency, a lack of any real reform, regardless of the Presidential winner
John Hardy asserted that the only election result scenario where the markets avoid volatility is one in which there is a clear and strong Biden victory where Democrats take the Senate back into their control. When one party has both houses of Congress under their control, this is when meaningful policy change can happen. If the Democrats are unable to secure the Senate, we expect a bitter partisan environment to exist for many years.
Speaking about the US dollar outlook, Hardy noted that even under the more volatile and chaotic election scenarios, Saxo Bank expects the US dollar to do well. Historically, the USD trades strongly on chaos and the Fed is experienced at managing such scenarios, avoiding super-spikes in price. Hardy also said that the US dollar downside, which is expected longer term, could be frustrated for some time by a strong Biden win because there will be a lot of interest in investment taking place in the US on the fiscal stimulus side under a Biden presidency.
USD performance concerns, however, are particularly high in the scenario of a divided Congress, and even more so with an unlikely Trump win. The impact of Covid-19 was also discussed with Hardy explaining that the US fiscal response has been huge, and from this point forwards the world will not be willing or able to finance US deficits. The USD will weaken as US inflation rises with no yield to reward holders of US dollars.
Meanwhile question marks remain over the refresh of fiscal stimulus measures after the key $600 per week extra federal benefit for the unemployed ran out in late July and was replaced with half that amount, with further measures to roll of at the end of this year. Hardy said that the two sides have been playing partisan politics and delayed support for unemployed people and industries hit worst by the Covid-19 crisis. At best this has taken steam out of recovery and at worst it means we are already risking a second dip and more major scarring of the economy as businesses go under, which will only worsen if no major further support programme is forthcoming until after the new administration is in place in late January.