Key Takeaways
With Joe Biden withdrawing from the presidential race, and vice-president Kamala Harris expected to succeed him as Democratic nominee, the polls might show a near-term bump for Democrats.
Financial markets, however, believed to still see Trump as the likely victor, with a good chance at a sweep of the House and Senate.
It is thought that a Trump presidency would see corporate tax cuts, deregulation, a reversal of the climate change agenda and higher tariffs domestically.
A more aggressive foreign policy is also expected, notably against China, which could also be bad news for emerging markets. There will also likely be less aid for Ukraine and less support of NATO.
The impact on the dollar is unclear, but both the fundamental backdrop and the prospect of Trump 2.0 would seem to favour equities. But it’s really a wait-and-see scenario.
Until Joe Biden stepped down as the Democratic candidate in the November US presidential election over the weekend, the news flow had been going decisively in favour of Donald Trump. Kamala Harris, now a near-certainty to become the Democrat’s candidate, should see a bump in the polls.
Nonetheless, the financial markets still see Trump as the likely victor. They also see a good chance of a clean sweep with Republicans taking back control of the Senate and holding on to the House. That would remove obstacles to their policies, notably on the budget.
What will this mean for financial markets? There is a general consensus that a Trump presidency would see corporate tax cuts, deregulation, a reversal of the climate change agenda and higher tariffs.
Although higher tariffs would generate fiscal revenue to offset tax cuts, they would also put up prices. This could push up bond yields. But tax cuts are considered good for the equity market and widespread tariffs would benefit smaller US companies in particular.
A more aggressive policy towards foreign relations, notably China, could also be bad news for emerging markets. Finally, both Trump and his Vice-President pick, JD Vance, are opposed to more aid for Ukraine and less supportive of NATO. Europe would have to meet more of its own defence bill.
The impact on the dollar is unclear: a risk-on equity rally would tend to weaken the dollar, but higher tariffs and concerns in emerging markets would work the other way.
More generally, we should not ignore the fundamental backdrop. The developed world outside the US is beginning economic recovery. Interest rates are headed lower. The US economy seems to have slowed and inflation data have improved, which is also a positive.
There is still a long way to go before the Presidential election and much can change. But both the fundamental backdrop and the prospect of Trump 2.0 would seem to favour equities with a broader benefit beyond the “Magnificent 7”. Elections so far in 2024 have had major market impacts in India, South Africa and Mexico to name just a few. We shall have to wait until November to see just how large the impact of the biggest election of all from a markets’ perspective will be. Until next week, goodbye.
