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Clear White House mandate required for markets to prosper, says OCBC

Ng Qi Siang
Ng Qi Siang • 5 min read
Clear White House mandate required for markets to prosper, says OCBC
Markets are currently pricing in heightened volatility over the next three months in anticipation of contentious polls.
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The 2020 US Presidential elections cannot be a repeat of the acrimonious 2016 polls where Republican Donald Trump was elected by the electoral college despite losing the popular vote, says OCBC’s Wellian Wiranto. A close or delayed result, he says, would present a significant challenge to the subdued market volatility that currently exists.

At present, Democratic challenger Joe Biden maintains a firm lead with 50% support against Trump’s 42.4%. These figures were based on an aggregate of existing opinion polls currently taking place in the US compiled by political news site RealClearPolitics. Yet the fact that Trump’s poll numbers have ticked up slightly following a reduction in cases could spell a tighter race come November.

“The fact that states such as Florida and Texas, which were previously badly affected, are now starting to see cases coming down would be important too, given the large electoral college vote counts whose swings in support would matter more than others,” says Wiranto. A quick rollout of a Covid-19 vaccine by the Trump administration could also offset his poor initial performance in handling the pandemic.

The ebbing wave of the second wave of Covid-19 could also result in the US economy picking up, presenting a significant boost for Trump. Additionally, Wiranto says that the margin of Biden’s lead over Trump now is not much different from Clinton’s lead in 2016.

“Indeed, if we want to be dogmatic about the numbers, Biden’s lead in early August was actually a tad narrower than Clinton’s during a comparable period back then,” he writes in a broker’s call on 25 August. Still, Wiranto warns readers that the race remains too close to call at the moment.

A Trump presidency is seen as favourable by investors due to both business-friendly policies and continuity of government. Strong stock market performance may hint that markets are skeptical about the polls predicting a Biden victory. Still, the unprecedented amount of market liquidity and low interest rates may distort market sentiment regarding the presidential polls.

Biden for business
Wiranto notes, however, that a Biden win may not necessarily be bad for markets should Republicans keep control of the senate, which holds the “power of the purse” to tax and spend. The former Vice-President’s plan to raise corporate taxes from 21% to 28% could be scuppered by a fiscally conservative upper house. With the Democrat’s ability to flip the senate in question, Biden may have to compromise on higher taxes if elected.

While such “cohabitation” resulted in legislative deadlock under the Obama presidency, Wiranto believes that a slim Republican majority would allow Biden to reach across the aisle to bring about bipartisan deals on specific issues despite greater polarisation. Republicans are unlikely to compromise on taxes, but clean energy and infrastructure development could be up for negotiation.

“While the idea of bipartisanship in US politics has seemingly gone the way of the dodo bird for a while, it may be less extinct than is commonly thought,” quips the OCBC analyst. This is especially since “Never-Trump” Republicans critical of the Trump presidency such as Senator Mitt Romney, who voted for Trump’s impeachment early this year, could rally around Biden as a counterweight against the former reality television star. They could even potentially be a moderating influence against the more radical wing of the Democratic Party.

In fact, it is important to remember that Biden himself was a veteran senator for more than three decades and has proven a master of legislative wheeling and dealing. He has successfully won over Democrats and Republicans alike to support legislative initiatives in the past. A Biden presidency could see less acrimonious bipartisan relationship compared with previous administrations.

A clear mandate
Ultimately, however, what markets will want to see most from the upcoming polls will be a strong mandate for whoever wins the upcoming elections. The polls are likely to be long-drawn and messy as Covid-19 disruption leads to special arrangements being made to ensure voter safety. Some political instability could arise if these arrangements lead to the very legitimacy of the pandemic polls themselves being called into question.

“It is not for nothing that, even as the market continues to be quite happy rallying, the pricing structure of the volatility spreads is telling another story,” worries Wiranto. The VIX index, which tracks the volatility for S&P 500, has indicated high volatility for the next three months despite a low reading of around 22. The gap between these figures has since widened to record levels.

Gaps between the 3-month implied volatility readings and near-term ones for the US Treasury and USDJPY foreign exchange pair (as proxies for bond and currency markets) have also widened of late. While “animal spirits” are presently placid, it appears that the market anticipates significant instability in the aftermath of the crucial polls. “It might be apt to say that market players are adopting the motto of “Don’t worry, but be ready,” notes Wiranto.

As of 26 August, The Economist predicts that Biden has a 9 in 10 chance of winning the electoral college with 352 votes to Trump’s 186. The Financial Times sees Biden in the lead with 50.6% support against Trump’s 42.1%, with the Democratic candidate likely to win 298 seats against 119 for Trump.

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