Market scenario when Democratic Party sweeps [Blue Wave].

As the US president, one third of the Senate and the entire House of Representatives comes to a close (November 3^rd, 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 

https://fred.stlouisfed.org/series/T10YIE#:~:text=The%20breakeven%20inflation%20rate%20represents,Constant%20Maturity%20Securities%20(TC_10YEAR).

Source: U.S. DEPARTMENT OF THE TREASURY

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield