Regardless of whoever wins the US election there will be no easy path to reforms and no healing of a divided USA, says Saxo Bank
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 today 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 said: “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.”
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 percent 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, saying: “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 monetization 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.”
John Hardy said: “The only election result scenario where we 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 said: “Even under the more volatile and chaotic election scenarios, we expect 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,” said Hardy.
Meanwhile question marks remain over the “refresh” of fiscal stimulus measures after the key $600/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: “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.”
About The Saxo Bank Group
Saxo Bank connects people to investment opportunities in global capital markets. As a provider of multi-asset trading and investment, Saxo Bank strives to empower people with a user-friendly, seamless and personalised platform experience that gives them exactly what they need, when they need it, no matter if they want to actively trade global markets or invest into their future.
Founded in 1992, Saxo Bank was one of the first financial institutions to develop an online trading platform that provided private investors with the same tools and market access as professional traders, large institutions, and fund managers. Saxo combines an agile fintech mindset with close to 30 years of experience and track record in global capital markets to deliver a state-of-the-art experience to clients. The Saxo Bank Group holds four banking licenses and is well regulated globally. Saxo offers clients around the world broad access to global capital markets across asset classes, where they can trade more than 40,000 instruments in over 20 languages from one single margin account. The Saxo Bank Group also powers more than 120 financial institutions as partners by boosting the investment experience they can offer their clients via its open banking technology.
Headquartered in Copenhagen, Saxo Bank’s client assets total more than 45 billion Euros and the company has more than 2,000 financial and technology professionals in financial centers around the world including London, Singapore, Amsterdam, Shanghai, Hong Kong, Paris, Zurich, Dubai and Tokyo.