Donald Trump or Joe Biden: how different US election outcomes could play out in markets and in China

A disputed US election would be unnerving for markets. A Biden victory, coupled with a split Congress, could be troubling for the US, but it would be an opportune time for China to lure investors away

Aidan Yao

Published: 12:30am, 22 Oct 2020

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With less than two weeks to go, the US presidential race has entered its final phase. Although Donald Trump is fighting an uphill battle and trailing Joe Biden in the polls, the sitting US president still has a lot of power to surprise. A late comeback like the one he made four years ago will be difficult this time, but not impossible.

But with the diverging performance of the two candidates, the market’s attention is increasingly turning to and focusing on two issues beyond the presidential election itself.

First, how will the shape of Congress change after the general election – specifically, will the Democrats make a clean sweep in the House and Senate? Second, will the election results be challenged, leading to a messy legal contest that creates uncertainty and volatility for markets?

Whether the presidential election will be disputed depends, first and foremost, on how close the result is. If Biden’s commanding lead in the polls translates into a landslide victory, it will be difficult for Trump and the Republicans not to concede defeat.

Here are a few scenarios of what could transpire on November 3, along with possible market reactions.

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First, a Biden win and a Democratic sweep in Congress: that would be positive for equity markets, removing uncertainty about policymaking in the next four years.

Apart from that, markets are expecting a large stimulus package from Biden, as well as increased infrastructure spending that will support US economic growth in the long term.

Although Biden is also likely to increase taxes, the consensus is that this will be done gradually and it won’t offset Trump’s tax cuts completely. However, what is positive for equities and credits is likely to be negative for rates, as long-term bond yields are expected to increase with inflation and rising bond supply.

Trump vs Biden: where they stand on key issues

Second, a Biden win and a split Congress: that would make for an uncertain policy environment as a lack of bipartisan consensus would make enacting legislation difficult.

With such an outcome, markets may look to the Federal Reserve to do more heavy lifting for the economy by further expanding quantitative easing and delaying interest rate normalisation.

Risk assets may come under pressure, while US bond yields could test the lower bounds of their recent trading range. Rising policy and economic uncertainties would probably keep market volatility elevated for some time.

Third, a Trump win and a split Congress: continuing the status quo would be likely to intensify today’s partisan conflict and make policymaking even more difficult in the coming years.

Governance may have to be done mostly by presidential decree, which has proved highly unpredictable and troubling for markets.

This outcome would be bad news for risk assets. For bonds, although more quantitative easing by the Fed would put pressure on interest rates, another four years of Trump could undermine international investors’ confidence in the US, leading to a weaker dollar and lower demand for Treasury bonds.

A disputed election would be unnerving for markets. The last time a US presidential election was disputed was in 2000, with Al Gore conceding defeat only after Supreme Court intervention that December. Over those weeks, the stock market fell by 7.5 per cent and the 10-year US Treasury yield fell by 40 basis points.

If a similar scenario plays out this year, it is reasonable to expect a large fall in stock prices and a rally in bonds, driving 10-year yields towards the Fed funds level of 0.25 per cent. The dollar would come under pressure relative to safe-haven currencies such as the Swiss franc and Japanese yen.

China will not be immune from financial markets’ wider reaction to the US election, even though its managed capital account insulates its markets. A win for Biden and the Democrats would be likely to give A-shares a shot in the arm, extending their lead over other markets in year-to-date performance.

A Trump victory would be bad for Chinese assets, with the market reacting to the prospect of further trade and economic tensions in the coming years. The equity market could give back much of its 2020 gains, while the renminbi would trade lower even against a weak dollar.

Who does China really want to win the US elections?

The uncertainty arising from a contested election outcome would hit sentiment in the near term, leading to potentially painful adjustments in A-shares and Chinese credits. How fast those losses are recouped would depend on the result of the legal contest.

A Biden victory, coupled with a split Congress, could be troubling for the US, but it would be an opportune time for China to lure investors who may be seeking to diversify. Under the “dual circulation” strategy, this could accelerate the development of China’s “external circulation”, expediting its integration into the global financial system.

Aidan Yao is senior emerging Asia economist at AXA Investment Managers

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