Research US: Election dominated by COVID-19 and Fed policy

Key takeaways

Election

Joe Biden is our favourite to win the US presidential election (60% vs. 40% for Trump). Biden is ahead in the national and swing states polls. Among the swing states, the most important to follow is Florida, as it is very difficult for Trump to get re-elected without Florida. Texas has also become more competitive.

Prediction markets believe the probability of a Biden victory is around 55%, so we are slightly more downbeat on Trump's re-election probability.

Trump and the Republicans are rebounding somewhat in the polls and approval ratings. Both have suffered from a combination of the handling of COVID-19, the economic crisis and George Floyd protests. The law and order strategy seems to be working well. Given the current situation, we believe things may change quickly in the coming months if COVID-19 gets under control and the economic recovery gets stronger.

Whether the new president can get his policy agenda through Congress depends on the Senate and House elections. The Democrats are clear favourites to win the House of Representatives, while the Senate is more or less 50/50 at this point.

The deadline for solving any election disputes in case the election is too close to call is 8 December.

Economic policy

A divided Congress would make it difficult for either Trump or Biden to change economic policy.

Biden has a progressive economic policy both in terms of tax increases and more spending (around USD4,000bn over 10 years, or 1.8% of GDP), which should be neutral for the government deficit overall but slightly positive for growth given fiscal multipliers are higher for spending than tax changes. We would also like to stress that policy proposals are usually watered down eventually.

Trump wants to continue deregulation and extend tax cuts but his chances are slim of winning both the House and the Senate.

US-China relationship

Tensions are here to stay regardless of the election results.

While Biden is likely to roll back tariffs on imports from China, he is keen on investing more in US technology and putting pressure on China to follow free market standards.

Trump would be more of the same including the risk of a renewed trade war.

US-EU/NATO relationship

Joe Biden would mean a normalisation of the US-EU and US-NATO relationships.

Trump would mean a continuation of the current uncertainty although the US-EU relationship has moved slightly in the right direction recently after the agreement on tariff reductions for a few items.

Monetary policy

We expect Fed chair Powell to be reappointed regardless of the outcome.

How the Fed will implement average inflation targeting in practice is a very important market theme in the coming months.

Tech regulation

A big unknown is future tech regulation. We lean towards expecting tighter regulation but that companies will not split up. The Democrats are probably more likely to tighten regulations than the Republicans are.

Markets

Overall, we believe the election is less important than the COVID-19 situation (including short-term fiscal support and vaccine/treatment news) and Fed policy with its new average inflation targeting regime. Hence, we expect the market impact across markets to be muted.

Equities: The business cycle is much more important for markets than the president. The "Trump trade" has been widely used as an explanation for the strong returns 1-6 months after the previous election. However, the prime reason was the global synchronised recovery, which took place even before Trump was elected.

FX: For currencies, the US presidential election essentially has two key dimensions: tax and trade (China). A clear Democratic victory (winning both the presidency and both chambers in Congress) would be the most USD-negative scenario, while a clear Republican victory would be the most USD-positive outcome. That said, we think there are more important drivers for EUR/USD near term: the September FOMC meeting, the ECB's view on EUR strength, global activity, equity markets and the potential for US fiscal easing.

Fixed Income: We do not see the election as a main driver for the US government bond market in the short term or in the medium to long term. The high issuance of US Treasuries will likely continue due to high deficits and the Federal Reserve will continue its QE programme.

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