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What the US election means for markets

12:56pm December 17 2019

Democratic Senator Elizabeth Warren speaks during a rally in September in New York City. (Getty)

In less than a year, America goes to the polls. 

But given the leading contenders for the presidency – Trump, Warren, Biden, Sanders and Buttigieg – offer starkly different visions for the economy, the 3 November 2020 US election arguably holds greater importance than other elections in the past.

It will be a major focal point for financial markets in the year ahead, impacting through multiple channels – monetary and fiscal policy expectations, trade policy, dollar policy, sentiment channels and regulatory changes in specific industries.

In fact, if the last few years were dominated by trade war headlines and volatility, 2020 will likely be just as marked by the race for the White House. 

It’s widely assumed that a Republican presidency is typically more positive for asset prices than a Democratic presidency. 

The DXY index, which tracks the US dollar, for instance has generally been stronger in the lead up to an election when the Republican presidential candidate led the polls, as seen with Bush in 2004 and 2000, Bush senior in 1988 and Reagan in 1984. In contrast, it’s been relatively weaker when the Democratic candidate is leading, for example for Clinton in 2016, Obama in 2012 and 2008, and Clinton in 1992 and 1996.

But most of the field are not traditional mainstream politicians and how markets might react must also consider candidates’ views, such as trade policy.

And as we detailed in a recent report, the main candidates' differ on several key policy stances. 

As for Trump, while he’s yet to formally outline a second term agenda more of the same seems very likely, including tax cuts 2.0, deregulation, infrastructure and an aggressive approach to global trade. Presiding over a strong economy and encouraging companies to set up shop in the US will be central to Trump’s 2020 message.

A second term Trump will sustain pressure on the Fed to ease rates and unlikely renominate chairman Jerome Powell when his term expires in February 2022.   

As for the Democrats, former Vice President and Delaware Senator Joe Biden is widely considered the front-runner. A centrist Democrat, Biden’s tax proposals do not include a tax on wealth or financial transactions, with his signature policies being a $US1.3 trillion 10-year infrastructure plan and a $US1.7 trillion Green New Deal to tackle climate change. He also opposes Medicare for All, a key difference with rival Democrat candidates Elizabeth Warren and Bernie Sanders, preferring to expand Obamacare at a cost of $US750bn. 

President Donald Trump (left) and Democratic candidate Joe Biden. (Getty)

Biden plans to fund these initiatives by raising $US3.2 trillion in revenue over a decade, modest compared to the plans of Warren and Sanders ($US20-plus trillion in 10 years in new taxes). It would include unwinding most of Trump’s tax cuts, raising personal income tax brackets on all income groups except the lowest brackets and lifting Trump’s 21 per cent corporate tax rate to 28 per cent (it stood at 35 per cent before the Republican tax cuts). 

Biden draws support from the “blue collar” manufacturing heartland but he is not known as a China hawk and has criticised Trump’s tariffs, arguing they hurt US consumers and workers more. 

The signature policy for Vermont senator Sanders is Medicare for All, a “single-payer, national health insurance program to provide everyone in America with comprehensive health care coverage, free at the point of service.” He plans “an annual tax on the extreme wealth of the top 0.1 percent of U.S. households”, with a progressive tax rising from 1 per cent for a married couple with a net worth of $32 million, to 8 per cent per annum on wealth over $US10 billion. He’s pledged to use tariffs as a tool of trade policy albeit in a more rational manner than Trump.

Both Sanders and rival Democrat Massachusetts senator Warren shares Trump’s circumspect views on globalisation.  

But Warren’s “economic patriotism” goes beyond Trump, stipulating preconditions trading partners must meet if they want to trade with the US, for example upholding labour standards, protecting human rights and meeting environmental requirements. 

Democratic presidential candidate Senator Bernie Sanders (left) and Senator Elizabeth Warren at a debate in Detroit. (Getty)

Warren has also called for actively managing the US dollar and an ultra-Millionaire Tax would apply to households with a net worth of $US50 million or more. 

Warren and Sanders’ taxation, social welfare and regulation policies are the most far reaching and disruptive for growth among the candidates and thus likely the most impactful for markets. Warren’s agenda also includes plans for manufacturing and Wall Street, plus proposals to break up giant tech companies e.g. reversing mergers & acquisitions including Facebook’s acquisition of WhatsApp and Instagram.

In contrast, a Michael Bloomberg, Joe Biden or Pete Buttigieg presidency would represent a return to centrist policy making, more modest spending and taxation measures and a much less combative approach to international trade. As such, if any of these three democrats won presidency it would be relatively benign for asset markets and the US dollar firmer compared to Warren or Sanders.

Despite wildcards under a second term Trump government, particularly his stance on the US dollar, more of the same is unlikely to rattle markets as much as change, particularly a surprise one.

But with asset prices high and three-odd years of Trump to go on, an election race without the odd surprise would be a brave bet to make. 

This article was co-written by Sean Callow, a Senior Currency Strategist at Westpac. 

This material contains general commentary, and market colour. This material does not constitute investment advice. This information has been prepared without taking account of your objectives, financial situation or needs. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts. Except where contrary to law, Westpac and its related entities intend by this notice to exclude liability for this information.

Based in New York, Richard runs Westpac's foreign exchange strategy group. Previously an economist in Westpac’s Economics Research team in Sydney and the Australian Federal Treasury in Canberra, a key area of focus for Richard has been a systematic approach to creating FX market signals including quantitative FX trading models.

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