The odds are shortening on a Joe Biden presidency after a torrid presidential debate that tanked Wall Street futures on Wednesday as polling showed voters are warming to a Democrat in the White House – an outcome markets aren’t necessarily ready for.
According to the YouGovAmerica/CBSNews poll, the Democratic nominee Mr Biden led 48-41, with 10 per cent undecided. Mr Biden gained six percentage points and President Donald Trump lost 18 percentage points in terms of viewers who thought better or worse about the candidates following the first debate in Cleveland, moderated by Fox News’ Chris Wallace.
S&P 500 futures dropped by 2 per cent peak-to-trough at the end of the broadcast, erasing earlier gains of 0.6 per cent. That unease was also reflected in the Australian dollar, which tends to trade in sympathy with Wall Street as a proxy for risk and fell 0.4 per cent to US71.14¢.
The S&P/ASX 200 Index dropped as much 1.6 per cent after the debate, and closed at a loss of 136 points or more than 2 per cent.
“For markets, a split between the houses, with the Republicans retaining Senate control, would be the worst outcome with fiscal policy becoming a fairly blunt instrument,” warned ANZ’s head of foreign exchange strategy, Daniel Been.
ANZ’s reading of the probabilities suggests the best outcome for growth is a Democratic sweep, installing Mr Biden in the White House and the Democrats taking control of the Senate (and the House).
That would not be US dollar positive, as accelerating global growth tends to favour other currencies against the greenback, such as the Australian dollar. It would also be fiscally stimulatory, alluding to the party’s climate and pandemic policies.
BetaShares Capital chief economist David Bassanese said elections were always times of caution. Some combination of the 2000 (legitimacy of votes) and 2008 (economic hangover) outcomes was a possible risk, he said.
“As in 2008, the US economy is in recession and most economists argue more fiscal stimulus is needed. Yet so far at least, Washington has failed to agree on a new support package, and there is a growing risk that more stimulus will now not be possible until the new year when the new president and Congress are sworn into office.”
A Biden victory may add to short-term volatility, but this is likely to be short lived.
— Shane Oliver, AMP Capital
The antagonistic performance of President Trump also puts the next leg of the US fiscal aid package in doubt, after it had already been dealt a blow with his nomination of Amy Coney to the Supreme Court before a possible second term is decided.
“While an extended period of uncertainty and court challenge is the most immediate worst-case scenario, the ultimate best scenario would most likely be if the status quo ultimately prevailed,” Mr Bassanese said.
From the equity market’s perspective, that would keep the tax cuts and deregulation push intact.
According to AMP Capital chief economist Shane Oliver, that is true in the short term, but there is no reason to expect the US economy will be worse off under a Biden presidency.
“A Biden victory may add to short-term volatility, but this is likely to be short lived,” he said. Mr Biden “is likely to take a less disruptive approach to trade and foreign policy”. If President Trump was re-elected, this could intensify.
Any acceleration of COVID-19 infections between now and election day would work against Mr Trump, which was why his best hope was to get the economy out of recession, Dr Oliver said.
The US is on track for a recovery of 8 per cent in the September quarter, which will be confirmed before voters hit the polls.
Historically, US shares have done best under Democrat presidents, AMP Capital finds, with an average return of 14.6 per cent since 1927 compared to 9.8 per cent under Republican presidents.
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