By: Tavaga Research
The forthcoming US Presidential election is a closely watched political event. Heated debates and exchange of accusations make it challenging to predict the outcome, engrossing the political pundits and market watchers alike. The outcome will reverberate throughout the world and weigh on the financial markets in the short term.
There has been tremendous volatility in the markets in the past week on the back of an impending election result and a resurgence in the coronavirus both in the US and Europe, with India VIX rising to 26.3 the highest in 3 months. Sensex, the benchmark stock market index in India, had shed over 772 points in the past week. The uncertainty results from the perception of drastic changes in the US policy post-elections. Although, it is difficult to anticipate the outcome, given the Biden lead has narrowed, the impact on the Indian market is likely to be positive since both Biden and Trump support a strong India-US relationship.
Impact on the stock market
Market sentiment is a prime determinant of market performance in the very near term. The impact of the US elections is going to be a focus on the markets this week. Irrespective of who wins the elections markets will remain volatile. Over the longer term though, several factors impact the performance of the stock markets, both domestic and global.
The key factors that influence the stock markets include macroeconomic factors such as inflation, GDP growth, unemployment, and domestic regulations. These factors are in turn influenced by the politics around the world. Domestic politics can cause uncertainty in policy and regulations, which in turn, has a bearing on the stock market performance. In addition, global political outcomes can influence domestic policy and therefore can impact the stock market performance indirectly.
The outcome of this election would provide future guidance about the policy. The bilateral trade between the US and India stood at $88.75 billion for FY2019-20, positioning the US as India’s top trading partner. This highlights India’s dependence on the US and therefore the possible impact the election could have on the Indian markets. The new president’s view on stimulus, debt, and deficits will have ramifications on the global equity markets, including India.
Impact on the gold prices
It’s generally understood that the value of gold is negatively correlated to the value of the dollar. A low dollar value means a higher price for gold and vice versa. Let’s look at the implication for gold in the following scenarios.
A Trump Win
A status- quo can be expected if Trump is re-elected. With the economy struggling due to the pandemic there is little chance of a change policy under Trump, whose economic policy was characterized by tax cuts, additional spending, and trade protection to boost growth. His “America First” agenda and the ensuing hostility towards China could destabilize the markets, benefitting gold.
In addition, the continued support for the stimulus will further increase the deficit, hence weakening the dollar and pushing up the gold prices. This assumes that Republicans control the senate.
A Biden Win
The Biden presidency could reverse the corporate tax cut implemented by the Trump administration, hurting corporate profits and financial markets in the near term. Higher taxes could go towards funding the spending, keeping a tab on the deficit over time. This will be favorable for gold prices. This again assumes that conflicting parties do not control the presidency and Senate.
A contested election – Result that is stuck in courts
A contest election could get investors worried about the stability of the US government and the dollar. This would be a bigger risk for the markets than a Trump or a Biden win. Investors should be ready to embrace weeks of uncertainty, in this case, proving the perfect catalyst for a gold rally.
A contested election would be the most unwelcome possibility and could trigger a sell-off in the emerging equity markets with investors resorting to the yellow metal.