Former President Donald Trump is gearing up for a showdown with President Joe Biden in the upcoming US presidential elections slated for November. Despite facing numerous legal challenges, Trump's campaign continues to gather momentum, with polls indicating a lead over Biden. Trump's decision to seek re-election places him in a select group of former presidents who have pursued another term, a rarity in US politics.
Additionally, both candidates stand out for their advanced age, with Biden already holding the record as the oldest person inaugurated as president at 78. If Biden is re-elected as President, he will be 82 years old by the time of the next inauguration in January 2025.
Investors are closely monitoring how differing policy approaches could reverberate across various asset classes. From foreign exchange to fixed income and commodities, each sector stands poised to respond to the outcomes of this pivotal election. In this analysis, we investigate the policies and individual sectors that may be affected in this election.
Trade Policies
Both candidates may advocate for US protectionism, with Biden rolling out a 100% tariff on Chinese EVs on 14 May 2024 while Trump proposes a 60% tariff on all Chinese imports. This signals a potentially more aggressive stance towards Chinese imports. These escalation in protectionist measures could significantly disrupt global trade flows, impacting currency markets, bond yields, and commodity prices.
Market Implications:
Escalating tariffs have the potential to trigger inflationary pressures, bolstering the USD's attractiveness as a safe-haven asset amid heightened uncertainty. In the forex market, currencies of economies directly affected by tariffs, such as the Chinese yuan (CNY) and the euro (EUR), may face downward pressure as trade balances suffer.
Expectations of higher inflation stemming from trade disputes may also lead to an uptick in the term premium of US Treasuries. A bearish steepening of the yield curve could occur if the Federal Reserve opts to hike rates in response to inflationary pressures.
In the commodities market, significant tariffs on imports from China could also exacerbate the fragmentation of global trade, prompting increased focus on reshoring and friend-shoring production of key commodities. This shift in supply chains could elevate demand and prices for commodities, affecting sectors such as energy and precious metals.
Geopolitical Considerations
A Biden administration might seek to reduce geopolitical tensions and foster international cooperation, whereas a Trump administration could escalate tensions with actions such as reducing support for Ukraine or threatening to withdraw from NATO.
Market Implications:
Heightened geopolitical tensions under Trump could drive up demand for the USD as a safe-haven currency, exerting downward pressure on the euro (EUR) and the Mexican peso (MXN) due to increased geopolitical risk.
The bonds market could experience increased inflationary pressures on both sides of the Atlantic, potentially moderating the rise in yields as investors flock to US Treasuries as a safe-haven asset.
In the commodities market, heightened geopolitical tensions and potential trade conflicts may increase production and transportation costs, supporting demand for investment metals like gold and silver.
Fiscal Policy Perspectives
Biden's potential policies may involve higher taxes on corporations and wealthy individuals to manage US debt levels sustainably, while Trump has advocated for further tax cuts.
Market Implications:
Initially, the infusion of fiscal stimulus is anticipated to provide a significant boost to US economic growth, potentially resulting in a strengthening of the dollar in the forex market as confidence in the economy rises. However, as fiscal deficits swell due to increased government spending, investors may grow apprehensive about the sustainability of US debt, particularly in the face of mounting long-term liabilities.
This concern could manifest in a significant sell-off of the US dollar as investors anticipate long-term yield increases, seeking refuge in alternative currencies perceived as more stable.
In the bonds market, heightened concerns surrounding fiscal deficits may translate into a surge in yields for shorter-dated securities, reflecting the perceived higher risk associated with near-term repayment obligations. Conversely, longer-dated maturities may witness increased demand as they are perceived as less vulnerable to immediate default risks.
Meanwhile, in the commodities market, the escalating debt-to-GDP ratios could drive investors towards tangible assets like gold, which traditionally serve as safe-haven investments during periods of fiscal uncertainty. As uncertainty surrounding the sustainability of US debt mounts, the appeal of gold as a hedge against inflation and currency devaluation may intensify, bolstering its prices and attracting investors seeking to diversify their portfolios amidst fiscal turbulence.
Monetary Policy Perspectives
Biden's administration would likely uphold the Federal Reserve's independence, contrasting with Trump's critical stance on recent rate hikes and suggestions of not renewing Chairman Powell’s term.
Market Implications:
The prospect of perceived political interference in the decisions of the Federal Reserve poses significant implications for both currency and bond markets. Any indication of such interference risks undermining market credibility, potentially resulting in a weakening of the US dollar and triggering a selloff in Treasuries.
This scenario could lead to an increase in yields as investors seek to offload their holdings amid heightened uncertainty. Additionally, concerns surrounding compromised central bank independence may fuel inflation expectations, intensifying the appeal of commodities like gold and silver as protective investments.
In times of economic uncertainty and perceived threats to monetary policy autonomy, investors often turn to tangible assets as a hedge against currency devaluation and inflationary pressures, further driving up demand for precious metals as safe-haven investments.
What does this all mean?
In conclusion, the outcome of the US election is poised to have a significant impact on global financial markets. However, predicting precise market reactions remains challenging. Investors should remain vigilant, staying updated on key developments throughout the election period and adjusting their investment strategies accordingly to navigate potential market disruptions effectively.
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