U.S Presidential Election Jitters Begin to Hit the Markets

Bob Mason
·5-min read

The Latest

There is one week remaining until the 2020 U.S Presidential Election and the markets are getting a little jittery.

While there have been no major scandals to sway voters, the U.S is in the midst of a 2nd wave of the COVID-19 pandemic.

In spite of the handling of the COVID-19 pandemic, however, Trump has managed to stay within range of Joe Biden.

The U.S President would have hoped for an effective vaccine ahead of next week’s election. It isn’t to be, however, which does leave the election hanging in the balance.

On paper, Trump’s re-election would be market positive, largely because of his business-friendly policies. In reality, however, failing to control both houses would leave Trump hand-tied for the next 4-years.

For this reason, the markets are looking for a “Blue Wave”. While Biden will repeal most, if not all of Trump’s policies, fiscal support would be delivered with ease, which is good enough for now.

As Election Day draws near-, however, some of the swing states are just too close to call and Biden’s lead in others is not hugely significant. This gives Trump a glimmer of hope and also gives the markets a seed of doubt over whether the Democrats can deliver a clean sweep.

If the last few weeks are anything to go by, failure to win both houses would likely lead to a political deadlock and very little substance over the 4-years ahead.

That’s before even considering the fact that Trump would likely contest a closely fought Presidential Election race. Assuming he loses…

The Polls

As both Trump and Biden make their final bids to become the 46th U.S President, the markets are taking a closer interest in the polls.

It may have been 4-years ago, but Trump’s shock victory and market response will not be a distant memory…

Based on the latest FT’s interactive Calculator and polling data, Biden has seen his lead hold steady following last week’s Presidential Debate.

The Challenger

As at 27th October 2020, the FT poll tracker projects Biden to win 279 Electoral College votes.

This is unchanged since a rise from 255 projected votes back on 23rd September.

Looking at the breakdown, the FT sees Biden holding 207 solid votes and 72 votes leaning in his favor. The split has remained unchanged over the last week.

Of the 72 Electoral College votes leaning in favor of Biden, Michigan, Pennsylvania and Wisconsin are swing states. These account for 46 of the 72 votes.

The other swing states are Arizona, Florida, Iowa, North Carolina, and Ohio, all of which remain on the fence. These account for 79 Electoral College votes.

When looking at the fence-sitters, Trump has slender leads in Iowa (0.1 pp) and Ohio (1.8 pp) based on rolling 14-day averages. Trump’s lead in Iowa slipped from 0.2pp last week while increasing from 1.7pp in Ohio.

By contrast, Biden has held onto reasonable but not significant leads in Arizona (3.7 pp), Florida (1.7 pp), and North Carolina (2.7 pp). While seeing his lead in Arizona increase, Biden’s lead in Florida and North Carolina fell from a previous week 2.3 pp and 3.3 pp respectively.

The narrowing in 2 of the 3 fence sitters leaning marginally in favor of Biden makes it even closer to call…

Incumbent Trump

For the U.S President, the FT projects a haul of 125 Electoral College votes. This is unchanged since a fall from 143 votes projected as at 23rd September.

The FT projects Trump to currently hold 83 solid votes, which is unchanged over the week.

Electoral College votes leaning in Trump’s favor have also held steady at 42.

The bad news for U.S President Trump is that he still does not have a single swing state leaning in his favor.

The Toss-up States

We’ve not seen movement here in recent weeks. The number of states sitting on the fence has remained unchanged at 134 Electoral College votes since 140 Electoral College Votes back on 23rd September.

5 of the states sitting on the fence are swing states and account for 79 Electoral College votes. And there’s Texas, with 38 Electoral College votes to also consider.

For Trump, however, even with all of the “Toss-Up” States voting in his favor, he would still fall short of 270.

That being said, a closely fought race would likely see Trump refuse to concede and contest the outcome.

Political Deadlock

One area of concern remains Trump’s unwillingness to concede. Based on the current projections, if Trump were to win all of the “Toss Up” states and his leaning and solid votes, he would win 259 votes. Biden would win the election with 279 votes. Trump would most likely then contest the outcome of the Election and postal votes in particular.

A prolonged period of political uncertainty amidst the 2nd wave of the COVID-19 pandemic would rile the global financial markets.

While political deadlock is a major concern, there is the possibility that Trump wins the U.S Presidential Election for a 2nd time.

Away from the U.S Presidential Election, there is also the senate race for the markets to consider. Winning the senate race is considered key to being able to deliver policies over the next 2-years.

There is also plenty of uncertainty over the outcome and whether the Democrats can reclaim the senate.

The Week Ahead

It is, therefore, not surprising that some market anxiety has become evident in recent days.

We can expect the markets to consider the polls in the coming days but discount any movements.

As we saw back in 2016, the polls can be misleading and a surprise outcome can have a material impact on market risk appetite.

So, we can expect some choppiness to creep in, with swings not too dissimilar to Monday on the cards.

As Biden looks to cement his lead going into next week’s election, Trump will no doubt use any means necessary in a bid to narrow the gap.

If the VIX is anything to go by, it’s going to be an interesting few days ahead.

At the time of writing, the U.S Dollar Spot Index was up by 0.21% to 93.1234.

This article was originally posted on FX Empire