The foreign policy and market impact of a Biden administration: China, Iran and the West

The US presidential election could inaugurate profound changes in American foreign policy. From China to Iran a Biden administration would produce strikingly different actions in some of the world's most volatile hot spots. When will markets begin to grapple with the implications of a potential Biden victory?

 Join FXStreet senior analysts Yohay Elam and Joseph Trevisani for an examination of the likely policy and market fallout from a change in the White House.

Joseph Trevisani: One of a Presidents most visible roles is as head of US foreign policy.

Yohay Elam: Indeed, the Commander in Chief has more impact on foreign policy, as Congress allocates funds (for those less familiar with American civics)

Joseph Trevisani: Trump has been very outspoken in some of his policies, and a stark contrast to his predecessors.

Yohay Elam: Outspoken indeed. There are some changes in policy, and some things stayed the same,

Joseph Trevisani: Would we see a reversion to Obama era policies should Biden win?  Particularly towards Iran and China?

Yohay Elam: The US is still in Iraq and Afghanistan. Trump left the Iran deal, JCPOA, that Obama signed. I would imagine that Biden would try to restore it, but it is a tricky task. The Middle East is always complicated. As an Israeli, I remember that every US president vowed to fix the Israeli-Palestinian conflict

Joseph Trevisani: Yes  Since Iran agreed to the deal they must have wanted its terms. So at least on that topic, it would seem Iran would logically prefer Biden. I have long thought that the only ones who can settle that conflict are the parties themselves.

Yohay Elam: Indeed, Israeli intelligence was OK with the Iran deal, the government was not.

Joseph Trevisani: Trump has offered Israel more support than Obama did. Would Biden revert to the distance policy of Obama?

Yohay Elam: Trump offered support and intervened in Israel's elections. I believe that Biden will stay away. Focus first on domestic topics. Biden is unlikely to rock the boat around Israel, nor Iran.

Joseph Trevisani: As did Obama in trying to defeat Netanyahu.

Yohay Elam:  Israeli Prime Minister Binyamin Netanyahu clearly prefers Trump.

Joseph Trevisani: Yes I would agree with that.

Yohay Elam: Netanyahu and Obama entered the office together in early 2009. They never had a good relationship. I cannot remember any intervention by Obama against Netanyahu in the 2013 nor 2015 elections. But Obama's Iran policy angered Netanyahu and the government.

Joseph Trevisani: Presidents often don't have a choice on ignoring foreign policy topics. A new president, if often tested, thinks Kennedy and the Cuban Missle Crisis.

Yohay Elam: Indeed, and Gordon Brown was tested with a terrorist attack in his first days in office. Bush was tested with 9/11.

Joseph Trevisani: The Obama administration used US funds to help an anti-Netanyahu effort, slightly under the table.

Yohay Elam: Trump's efforts were all over the table Recognizing the annexation of the Golan Heights.

Joseph Trevisani: Exactly.  A new president often wants to concentrate on the domestic topics, he is rarely allowed to.

Yohay Elam: Moving the embassy to Jerusalem. Bush's leadership was forged in crisis. In my opinion, he made a huge mistake with Iraq, but he was able to unite the nation. What crisis would face Biden? I have no clue at this point...

Joseph Trevisani: Yes.  The move to Jerusalem had been promised by every previous president, but Trump actually did it. To no real objections from the Middle East. Iran is my guess for an immediate crisis in a new administration.. 

Yohay Elam:  Yep, I happened to land in Israel for a visit on the day of Trump's announcement. It ended with two days of riots but that's it. Iran is an ongoing challenge. Israel occasionally strikes Iran in Syria.

Joseph Trevisani: The Iranians have proved adept at reading US presidents.

Yohay Elam: Coordinating with Russia, Iranians are very smart people suffering from a cruel regime. Perhaps Iran will test Biden in Iraq.

Joseph Trevisani: That is true. I would guess or on Israel's borders.

Yohay Elam:  Hezbollah is capable of striking most of Israel from Lebanon. Hezbollah is a Shiite faction that is the most prominent military force in Lebanon. It is backed by Iran.

Joseph Trevisani: I think we can agree a test is likely. We also have China both on trade and politics in the South China Sea, HK, and Taiwan. A lot of room for testing.

Yohay Elam: And Russia.

Joseph Trevisani: Iran's Shiite crescent. I was in Lebanon a few years ago and the difference between the various controlled areas was striking.

Yohay Elam:  Iraq's largest ethnic group is Shiite, and Syria's ruthless dictator Bashar el Asad is an Alawite, a Shiite-associated minority that controls the country.

Joseph Trevisani: Beautiful country, a friend of mine has a house, in the hills outside of Beirut.

Yohay Elam:  When were you there? I would love to go. It is surely a fascinating country.

Joseph Trevisani: 2014.

Yohay Elam: I am eaten with envy. My father was there in 1982, near Beirut's airport. As a soldier...

Joseph Trevisani: Parts were uncomfortable, all was fascinating. Yes, the endless wars of the Middle East.

Yohay Elam:  You enjoy life every second you can. And then there's the occasional war.

Joseph Trevisani: A realistic point of view. Realism is much closer in much of the world than here in the US and most of Europe.

Yohay Elam: I recommend watching "Beirut, la vie en rose" a documentary about the life of the diminishing elite of Beirut.

Joseph Trevisani: But back to China.  I think the potential conflict, or to put it better, the areas for China to seek advantage on a new president are several. Do you mean the Maronites?

Yohay Elam: Indeed. Regarding China, there are many points of contention. I wonder if Biden would try reviving Hong Kong's autonomy. The damage is probably done

Joseph Trevisani: Yes.  In a way Trump trade war with China, took most of the initiative from Beijing.

Yohay Elam: They took the initiative in Hong Kong.

Joseph Trevisani There is unfortunately no practical way to revive HK. Yes, astutely playing the pandemic to their advantage.

Yohay Elam:  Indeed, I also think investors don't care about human rights in HK.

Joseph Trevisani: Agreed.

Yohay Elam:  HSBC and Standard Chartered supported Beijing on the move.

Joseph Trevisani: How much choice do they have? Except to leave?

Yohay Elam:  They're in the business of doing business. And as long as shareholders have no issue, the bank bosses do not have an issue either.

Joseph Trevisani: When I was last there just before the handover..the most popular dance club was called 1999

Yohay Elam:  Partying like it was 1999.

Joseph Trevisani: Exactly, and so they were. I am surprised China permitted independence as long as it did.

Yohay Elam:  The economic explanation is that at the time of the handover, HK's economy was huge in comparison to China's. And now it is much smaller. Do you see a risk to the HKD peg?

Joseph Trevisani: Yes, but the potential for China was always far greater. Not as a political weapon. That decision is already made. The world will do business with China, irrespective of HK. I think it was Lord Palmerston who said. I paraphrase, countries do not have permanent friends, only permanent interests.

Yohay Elam: Indeed, I'm familiar with that phrase, I thought it was Churchill, but so many quotes are associated to him...

Joseph Trevisani: Nice graph. Would a testing conflict under a new Biden presidency be dangerous to global trade? This is the original: “England has no eternal friends, England has no perpetual enemies, England has only eternal and perpetual interests”.

Yohay Elam:  I think that Biden has vast foreign policy experience and he is likely hire people with significant knowledge and experience. China could test Biden in his early days. Or test the outgoing Trump administration. One of Israel's wars in Gaza was in late 2008. In the transition period around Christmas if I''m not mistaken.

Joseph Trevisani: Biden is likely to be tested should he win. The temptation would be far too great for any of America's enemies to resist.

Yohay Elam:  Biden will likely be tested and will have the means to respond. Trump never admits errors and hires yes-me. I think he's at National Security Adviser No. 4. China moved against HK during Trump's time.

Joseph Trevisani: In fact, I would say it's a guarantee. You are far more confident in that than I am. I worry about his incapacity. Nothing paralyzes a bureaucracy more than an incapable leader.

Yohay Elam: Would they go for Taiwan in his second term?. Incapable leader, that must be Trump.

Joseph Trevisani: China moved on HK during the pandemic, not specifically Trump.

Yohay Elam:  Would they have seized the opportunity if Trump hadn't needed them for reelection? Trump pleaded Xi for help according to Bolton.

Joseph Trevisani:  One opinion certainly, but I was referring to Biden and his, to put it delicately. 'moments'.

Yohay Elam: Biden is more trusted as a leader. Trump is absent in the coronavirus crisis. Administrations heavily depend on listening to advisers experts.

Joseph Trevisani: The testing period is within six months if Biden wins.  How might it impact the global economy?  Would we see a reversion to the dollar risk premium if say, Iran, openly begins to enrich uranium to weapons-grade? Or if China as you say, moves on Taiwan. When authoritarian governments  state their intentions, I tend to believe them and China has declared Taiwan, or Formosa as it  was often called when I was there, to be an irreducible part of China.

Yohay Elam: Beijing talked about aiming for a "peaceful reunification" with Taiwan an ominous threat. Indeed, authoritarian regimes have no parliaments to answer to.

Joseph Trevisani: Very. China's definition of peaceful could use some work.

Yohay Elam:  They still need bread and circus for their citizens. It's either peaceful or less peaceful.

Joseph Trevisani: Have you seen the movie, Gladiator? Great re-creation of the Coliseum. The Romans could certainly build.

Yohay Elam:  Indeed, I live in ancient Barcinno, that later turned into Barcelona. They "pacified" the peninsula.

Joseph Trevisani: So we might say if Biden wins...but dollars. I doubt the Romans were any more brutal than anyone else at the time, just much more successful.

Yohay Elam:  They had a good administration until they didn't.

Joseph Trevisani: True, but 600 years later.

Yohay Elam:  A pandemic weakened them at some point.

Joseph Trevisani: I think the currency markets will begin to pay attention to the US elections in the fall.  A potential Biden victory is not priced. Yes, Byzantium too.

Yohay Elam:  I stick to my opinion that markets are OK with Biden, but not with a clean sweep by Democrats, given their leftward leanings. Markets do not want to feel the Bern but could live with a paralyzed Congress.

Joseph Trevisani: I am not so sure, though I agree completely a Democratic sweep will terrify the markets. And then there is Warren.

Yohay Elam:  While the president has more impact on foreign policy, I think markets move more on domestic policy. Warren on banks, Sanders on healthcare, AOC on the green front, everything to worry for banks, pharma, and oil companies.

Joseph Trevisani: That is true.   Not to mention the overall economy.

Yohay Elam:  Under Democratic presidents, more Americans do better. A clean sweep for Dems would improve a lot of most people, but not Wall Street. A more European and the US would be good for most people

Joseph Trevisani: Well, considering that Wall Street was almost completely for Clinton, one has to wonder.

Yohay Elam: Clinton's husband kicked off the deregulation. That later accelerated. Biden would be more left-leaning than Clinton. Given the party's shift. But he would be more moderate if Republicans hold onto the Senate. If Trump continues ignoring coronavirus, Dems could sweep the Senate.

Joseph Trevisani: Markets are not so worried about Biden who has been in Washington for 40 years. But about his ability to hold the line against a very leftist party.

Yohay Elam:  Dems' leftward shift, can that be attributed to the same forces that brought Trump to power? The disgust of mainstream policy and politicians.

Joseph Trevisani:  A reaction to those forces  yes, without a doubt.

Yohay Elam:  The 2008 crisis was never fully resolved. Which allows me to circle back to China. Chinese growth after 2008 held up the global economy. A huge credit bubble.

Joseph Trevisani: We only have one globe, though Elon Musk is working on getting us another.

Yohay Elam:  Bitcoin HODLes are also into going to the moon.

Joseph Trevisani:  I would say the global economy is running on a decade's worth of liquidity. 

Yohay Elam: Mr. Musk may be Kanye West's VP. Outlandish

Joseph Trevisani: But entertaining.

Yohay Elam:  President Trump is an entertainer. And recent vaccine announcements have been like a reality show. Cable news' talk shows are shouting contests, show biz, and politics...

Joseph Trevisani: Thomas Friedman, the NYT columnist,has a piece this morning, saying essentially that Biden should not debate Trump. If it is in the Times it is considered Democratic opinion. There are many places to go for careful political analysis, but it takes a bit of effort.

Yohay Elam:  Thomas Friedman, I read his book about his time in Beirut. I doubt Biden would skip the debates like Netanyahu stopped debating opponents, but letting Trump be Trump would be a foolish political strategy. Concluding words about China?

Joseph Trevisani: Agreed. China could be the initial threat to a prospective Biden administration.

Yohay Elam: The current administration clashed with the world's second-largest economy and the next leadership will also be tested by Beijing. I think Biden's experience and reliance on experts will help him better cope with the threats and opportunities.

Joseph Trevisani: I disagree but interestingly agree I think the China trade deal will remain in place.