draws near, and investors are on high alert
as the outcomes of Kamala Harris’s and Donald Trump’s contrasting economic
policies could have significant ramifications for the financial markets. With
key decisions looming around tax rates, regulation, energy policy, and trade,
the potential for market volatility increases depending on who gets into the
White House and what the new balance of power in the U.S. Congress will be. In
this article, Octa Broker’s financial analyst, Kar Yong Ang, breaks down the
candidates‘ divergent economic visions and outlines possible scenarios for
market reactions post-election, offering critical insights for traders to
navigate the uncertain financial landscape ahead.
With less than a day to go until
the U.S. presidential election, investors and traders are bracing for the
potential impact on the financial markets. Although both candidates (Kamala
Harris and Donald Trump) proclaim to pursue similar goals–––notably, creating
jobs and boosting the U.S. manufacturing base–––they offer very different
approaches to economic policy. Therefore, financial markets will almost
certainly respond differently depending on who ultimately gets into the White
House. Furthermore, it is important to factor in the possible changes in the
arrangement of power on Capitol Hill, as 33 out of 100 senators and all 435
delegates in the House of Representatives will also seek re-election this
November.
At Octa Broker, we decided to offer
our view about what to expect from the upcoming elections and what could be the
possible impact on the financial markets in general and on gold and the U.S.
dollar in particular. Before we lay out the possible scenarios, let’s first
briefly recap the economic policy visions of Vice President Kamala Harris, the
Democratic Party candidate, and of former President Donald Trump, the
Republican Party nominee, and underline their key differences. Please note that
this article will focus specifically on the candidates‘ economic policies that
are expected to have the most impact on the financial markets and affect an
average trader. Thus, the general focus is on tax policy, regulation, energy
policy, foreign policy, and tariffs. The article will not delve into the
details of other policies, such as abortion rights, immigration, housing, and
healthcare policy.
Table
1: Comparing the Candidates
‘When
you wake up on 6 November to check the results of the U.S. presidential
elections, there are two things to keep in mind’, argues Kar Yong Ang, a financial
market analyst at Octa Broker. ‘Firstly,
it is vital to realise just how decisive the victory of either of the
candidates is. Secondly, it is very important to ascertain the new composition
of the Legislative Branch‘. Indeed, if either Harris or Trump wins the
national popular vote with only a slim majority or the Electoral College
produces mixed and uncertain results, the investors may get nervous, and market
volatility will rise. ‘Contesting
results are not good for the markets, as they may trigger disputes among the
parties and delay important economic decisions in the best-case scenario and
lead to social unrest and violence in the worst case’, Karr says.
The composition of the House and
the Senate is equally important as they will largely determine the ultimate
balance of power and the direction of the legislation. According to ABC News
simulation, Republicans win control of the Senate 88 times out of 100[1],
meaning that it is highly unlikely that the Democratic Party can manage to take
out the upper chamber of the U.S. Congress. When it comes to the House of
Representatives, however, the chances are 50/50.
Thus, it seems reasonable to infer that only four potential scenarios exist in
this election (see the table below).
Table
2: Possible Scenarios and the Dollar Impact
Scenarios
1 and 2
Scenarios 1 and 2 assume that
Kamala Harris becomes the next President of the United States, but her
executive power is severely or partly limited. In case Republicans capture both
the House and the Senate, Harris’s policy initiatives will be blocked or substantially
amended. On balance, a Harris presidency facing a hostile Congress would bring
about a politically unstable and unpredictable environment, which investors
despise. As a result, the economy will underperform, stocks will decline, and
the dollar will weaken.
‘A
government paralysed by dysfunction and gridlock is the worst-case scenario for
the U.S. economy in general and for the U.S. dollar in particular’, says Kar
Yong Ang, a financial market analyst at Octa Broker. ‘The probability of a protracted government shutdown is very high under
this scenario. U.S. stock market indices will certainly take a hit’.
Indeed, Harris’s progressive
initiatives on climate and the environment will be blocked, while fiscal and
economic policy will become a key point of contention, leading to a major
standoff over the budget. At the same time, Harris’s presidency might result in
less government spending, which will have a disinflationary impact, enabling
the Federal Reserve (Fed) to continue reducing interest rates. That, too,
however, will have a long-term bearish impact on the U.S. dollar.
In turn, the greenback’s weakness
may have a bullish impact on commodities, especially gold, as it will become
more affordable for holders of other currencies. Another bullish factor for
commodities in general and for gold, in particular, is that the conflict in
Eastern Europe will likely drag on under Harris, given that she has been more
in favour of supplying the weapons rather than pushing for a peace deal.
‘All
in all, I think Harris’s presidency will be met with a bearish reaction in U.S.
equity markets–––especially in the energy sector. Companies focusing on
renewables may perform better but still suffer in the long term as Harris will
struggle to push her environmental agenda. The U.S. dollar will almost
certainly sell off, while the euro and Chinese yuan will strengthen’, concludes
Kar Yong Ang.
Scenarios
3 and 4
Scenarios 3 and 4 assume that
Donald Trump becomes the next President of the United States, but his executive
power will either be partly limited by the Democratic House or, alternatively,
he manages to achieve a sweeping victory with the Republican Party taking full
control over both chambers of Congress. In this case, investors will likely
cheer (at least in the short term), as Trump promises to cut red tape and
reduce taxes. Stock indices will rally, and the dollar may strengthen. Still,
there will be long-term risks associated with Trump’s trade policy.
‘The
fears over U.S. debt sustainability will certainly rise under Trump’, says Kar
Yong Ang, a financial market analyst at Octa Broker. ‘He will extend as well as enlarge the tax cuts, essentially bringing
about a loose fiscal policy, which, in turn, will force the Fed to be hawkish’.
Indeed, a Republican sweep victory is the most bullish scenario for the
greenback in the midterm. Inflationary tax cuts will boost the economy and may
potentially force the Fed to stop its rate-cutting campaign, which will support
the U.S. dollar vs other currencies. However, the U.S.’s gigantic deficit will
likely keep expanding. Reuters estimates that Donald Trump’s tax cut plans
would add some $3.6 trillion to $6.6 trillion to federal deficits over a decade.
On the one hand, tax cuts may serve
as a catalyst for U.S. economic growth, which should support oil prices,
especially given that Trump is likely to enforce stricter sanctions against
Iran. On the other hand, U.S. crude oil and natural gas output may rise as the
Trump administration will likely support the companies engaged in fossil fuel
production.
Trade policy is not expected to be
Trump’s top priority, but he may still introduce new tariffs in 2025-2026.
First and foremost, this will negatively affect China and its currency, the
yuan. At the same time, Trump’s victory will be a major bullish factor for the
crypto industry in general and for digital currencies in particular. He made no
secret of his support for crypto and even advocated for the establishment of a
national Bitcoin reserve.
‘All
in all, I think Trump’s presidency will be met with a bullish reaction in U.S.
equity markets–––especially in the energy sector, and especially in case of a
sweeping victory. Companies with a focus on renewables will underperform,
bitcoin will rally, while the euro and the Chinese yuan will fall. However, the
market has already partly priced in Trump’s victory. Therefore, in a classic
‘buy the rumour, sell the news’ scenario, the asset prices I just mentioned may
actually drop immediately after the election, but will likely remain supported
in 2025’, concludes Kar Yong Ang.
About
Octa
Octa is an international broker that has been providing online trading
services worldwide since 2011. It offers commission-free access to financial
markets and a variety of services used by clients from 180 countries who have
opened more than 52 million trading accounts. To help its clients reach their
investment goals, Octa offers free educational webinars, articles, and
analytical tools.
The company is involved in a
comprehensive network of charitable and humanitarian initiatives, including the
improvement of educational infrastructure and short-notice relief projects
supporting local communities.
Since its foundation, Octa has won more
than 70 awards, including the ‘Best Forex Broker 2023’ award from
AllForexRating and the ‘Best Mobile Trading Platform 2024’ award from Global
Brand Magazine.
This article was written by FL Contributors at www.forexlive.com.