Elections, interest rates and markets

2024 is a record year for elections with more people going to the polls than ever before. They’ve been causing record volatility in the markets too, notably in Mexico, India and South Africa and, most recently in France where Macron’s decision to hold a snap election for the National Assembly pummelled French bonds, French equities and weakened the euro. By contrast, UK markets took Rishi Sunak’s equally unexpected decision to call early elections in their stride. We consider the market impact of elections in Europe, the UK and, the most important of all, the US.

Some fear that Trump 2.0 could usher in a Liz Truss moment with soaring bond yields. This is unlikely in my opinion. Yes, we would expect Trump to cut taxes, but he is also likely to raise tariffs on US imports, perhaps by 10% across-the-board. The net effect on the fiscal deficit could be modest. When it comes to monetary policy, the US Federal Reserve is independent and although Donald Trump has said he would fire Jay Powell, it is unlikely that such a move would change actual policy. There is a strong consensus in favour of the existing arrangements and the experience of Liz Truss has quietened the voices of those calling for the White House to exert greater control over the Federal Reserve. Moreover, there are important legal and other barriers to this.

And if Biden were to win? He is obviously the continuity candidate, but the make-up of Congress is important here. Biden’s tax raising efforts were stymied by moderate Democrats in the Senate, highly effective given their wafer-thin majority. But several of the moderates are retiring and their successors are generally much more left wing.  A recent Goldman Sachs conference suggested that a clean sweep by the Democrats in this year’s elections could usher in significant policy changes including a rise in the corporate tax rate to 25%. What are the chances of this?  Of the 34 Senate seats up for election this year only 5 look likely to change hands and 4 of those are held by the Democrats. Any they need to regain control of the House.  So, a clean sweep by the Democrats with radical policies to follow is a possibility, but certainly not the central scenario.

The recent European elections saw big gains for the far right. The result is likely to be an attempt to restrict the power in Brussels, backsliding on climate change policies and greater efforts to restrict immigration. At the National level, we would expect the right-wing parties to follow the example of Giorgia Meloni, PM of Italy and move towards the centre. In particular, nearly all the right-wing parties in Europe have dropped plans to exit the EU, another example of a UK precedent that they wish to avoid. And of course, the ECB is independent, even more so than the US Fed. In my view, the panic buying of German bunds seems overdone and I’m not expecting a European financial crisis.

And the UK? The opinion polls suggest that Labour will win convincingly. Keir Starmer’s Chancellor is moderate and cautious. She does have ambitious spending plans, notably on investment and will not want to stick to the current government’s unrealistically low spending plans in unprotected areas. Taxes will almost certainly go up, but they have promised to leave the main rates of income tax, national insurance and VAT unchanged. But I reckon the fiscal deficit is improving anyway.  The UK economy is recovering better than most forecasters expected and my colleague Chris Mahon discussed last week how changing the way the Bank of England unwinds its bloated balance sheet could generate many billions for the Treasury. So, I don’t expect a big impact on UK markets or monetary policy and we might see a rally in gilts.