What will happen after US election?

Americans will vote next week. Not only the president will be voted on, but also a third of the senators and all members of the House of Representatives, where possible majority shifts could have major impact. But the primary focus will be on the presidential election. At the moment, the challenger Biden is leading relatively clearly in the polls. However, the US system of state electors makes it more difficult to make a prognosis, since the distribution of votes among the states plays an important role and a winner does not necessarily have to achieve a majority of the votes overall.

A close result on election day could mean that a decision on the winner of the election could take longer. This is for several reasons: projections after the polling stations close on November 3 are likely to be more uncertain this time than usual, as both turnout and the number of postal voters are expected to be very high. It would then be necessary to wait for further vote counting, which could take many weeks. A close initial result will also increase the likelihood of state results being contested, especially if President Trump is behind, as he has already questioned the postal vote in advance. In the worst case, the process of determining the next US president could drag on into next year. A clear majority for one of the two presidential candidates, on the other hand, would reduce the risk of a long period of uncertainty, which should be welcomed by the markets.

However, the markets will also take into account future majorities in the Senate and the House of Representatives when assessing the situation. This is essentially for two reasons: on January 6, the two chambers of the US Congress will meet to count the votes of the electors and to announce the official result. Any objections to the results of individual states will be voted on, whereby a majority by state (delegations) in the House of Representatives is required. Currently, Republicans hold this majority. If this changes in favor of the Democrats, there would potentially be one source less for a protracted dispute over the outcome of the election. The second reason is the pending next stimulus package, on which the two chambers have not yet been able to agree. This is of great importance for the economy. Without fiscal measures, the incomes of the more than 25 million recipients of unemployment benefits are likely to fall sharply as emergency measures expire. If the two houses continue to hold different majorities, agreement on a smaller but earlier (i.e. before the end of the year) stimulus package can be expected. If, on the other hand, the Democrats also take over the majority in the Senate, a larger package can be expected, which, however, might only be decided by the newly constituted Congress in January.

Next Tuesday, therefore, the stakes are high. The markets will consider and weigh a variety of factors, which means a wide range of possible reactions.

US Fed will wait

The US Fed's monetary policy decision next week is likely to be lost in the hype over the outcome of the US election. There is no doubt that Election Day has also been incorporated into the Federal Reserve's planning and key decisions have already been taken over the past months.

But with the recent sharp rise in COVID-19 infections over the last few weeks, members of the monetary policy-setting body FOMC will have to rethink their expectations for the economy. However, there is still no data basis for this, as the increase in infections occurred only recently. There is also further cause for concern for the economy, as agreement on a new fiscal package is still awaited. This points to a weak economy in the fourth quarter, although the first few weeks should have been quite good. However, representatives of the Fed have repeatedly stressed the importance of a new fiscal package for the economy. A decision on how monetary policy will react will probably be announced at the last meeting of the FOMC in December. This could consist of the still outstanding specification of a purchasing program, which should be generous and should run at least for the whole of 2021. We consider measures beyond that to be unlikely at present. Not least because the outlook may have improved in December compared to now. It is likely that a new fiscal package will be in place or within reach by then. Furthermore, the availability of a vaccine could become apparent in December, which should also brighten the economic outlook. Next week, we expect a concerned but wait-and-see US Federal Reserve.

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