As the US president, one third of the Senate and the entire House of Representatives comes to a close (November 3rd, 2020), a survey found that Democratic Party candidate Joe Biden continues to lead the race against Republican candidate Donald Trump by big difference according to CNN. Reportedly, in a poll of voters who are willing to vote, Biden was leading Trump 54% to 42%. It was analyzed that the gap between the two had been the largest for 20 years. However, we do not know whether the poll is exact or not due to many reasons as some insist CNN is part of Democratic Party supporter. Forecasting which party will take over White House and Congress is fairly impossible. But the guesses of market direction are emerging as polls indicate that Democratic Party is about to sweep.
Bond Market
The scenario that can cause the greatest
volatility in the bond market in the short and long term is when Democrats
occupy both the White House and the U.S. Congress. If this scenario is comes to
reality, the US 10 year Treasury is expected to surge creating bear steepening
yield curve. In order to cover the 2 trillion +a stimulus plan, more fiscal
budget is needed. Therefore, the government will likely to raise tax and issue
additional treasury. Therefore, as supply of government bond increases, the
more interest rate is needed to raise the fund for stimulus package.
Stock Market
Meanwhile, a steep rise in Treasury yield
is expected to have a negative impact on the US stock market. If tax hikes and
new taxation are implemented as Democratic Party's pledge, it will lead to ‘crowding-out
effect’ with investors in risk-off stance and a decline in corporate
investment. However, there is possibility that stock market would not fall very
sharply due to hope in support of policy mix; combination of monetary and
fiscal policy. Since the liquidity environment is being floated, the risk of the
crowd out effect is not very big deal. The outlook for the stock market is
quite mixed due to many possibilities.
Currency Market
The dollar has been weakened mainly due to
three reasons: relatively strong Chinese GDP growth has made Chinese currency
attractive, investors are buying Chinese corporate bonds (yields are higher
than U.S) as Chinese government is steadily in progress in opening their
financial market, and expectation of Democratic Sweep (Blue Wave). This can be
quite controversial as many investors think that treasury yield increase, the
value of currency rise together. However, the yield only applies to market
interest rate (usually 10 year). Since Fed is targeting call money rate (short
term interest rate), low chance of strong dollar will likely to appear. Fed
will continue increase money supply as more stimulus package is needed,
therefore, more chance of inflation will emerge, which means real yields will fall more than nominal yields grow. Please check my blog below.
https://techongstudy.blogspot.com/2020/09/real-yield-is-reason-for-market-mover.html
Global Trade
Candidate Biden and Democratic Party's
trade pledge does not differ much from the current Trump administration's trade
policy. Candidate Biden pledged to promote trade policy that benefits Americans
such as labor market. The policy is to recover domestic unemployment rate
deteriorated by COVID-19 and strengthens domestic manufacturing industry in the
slogan of 'Made in America' and 'Buy American'. “Economic security is national
security”. Biden announced to correct China's unfair trade practices and reform
China's structure, which undermines the multilateral trade order. The strong
policy toward China is expected to continue regardless of the election results.
Source: Saint Luis Fed
Source: U.S. DEPARTMENT OF THE TREASURY
Whoever wins this US presidential election will change the world. You have summed up various information well. Thank you for alwsy saving my time.
답글삭제No problem. Thanks for the interest.
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