The working assumption is that Joe Biden will be the next President of the United States. The latest analysis, as outlined in Nate Silver’s fivethirtyeight report, gives Trump only a 22% chance of winning on 3rd November. Markets are priced for that outturn, but are wary to place too much weight behind it, despite all the major polls, both state and national, suggesting that Biden will comfortably win both the popular and electoral-college votes.
They are right to be nervous. Back in 2016, Nate Silver gave Trump a 28.6% chance of winning the Presidency. Against the odds he won North Carolina, Florida, Wisconsin, Michigan, and Pennsylvania, and with them 90 electoral college votes that put him over the top, despite losing the popular vote by over 2.8 million votes to Hillary Clinton.
After Trump’s 2016 victory, the US dollar index rallied by over 6% in the space of two months (see chart), scotching suggestions that elections aren’t big market moving events.
In 2020, Trump’s policy programme involves deeper tax cuts, lighter regulation and a continuation of America First. Biden’s programme looks to raise taxes and spending, tighten regulation, and reach out to China and the EU both diplomatically and for deeper trading ties. These programmes could barely be more different from an economic and political standpoint, and therefore the market reaction is likely to be significant, but more so if Trump wins, because it is viewed as a much less likely event.
Trump’s victory could see the dollar rally against the pound and euro, to $1.18 and $1.08 respectively. Less fiscal support from the US government, versus what Biden and the Democrats are prepared to offer, could mean the US Federal Reserve has to seriously consider negative interest rates. Bizarrely that could prove helpful for the US Treasuries market and support a stronger US dollar.
As for Biden, the most likely outcome is that he wins but doesn’t gain both Houses. The Republican dominated Senate will therefore block much of his policy programme, without them being significantly watered down. That is only moderately US dollar negative, but could set the tone for the dollar in the months and quarters to come.
Can Trump win? Yes he can. Will he win? This election is Biden’s to lose, but we’ve seen it done before, and some of the polling data is eerily similar to 2016. The financial market, economic and political ramifications of this election could be enormous, just as was said in 2016.
Brexit trade negotiations – not done yet
Realistically, there are about 6-7 weeks left of negotiations between the UK and EU before a deal must be reached on trade. The bluster and bravado, after recent rounds failed to break the deadlock, have been unbecoming the seriousness of the outcomes that face both sides if negotiations fail.
Threats and counter threats only serve to prove how desperate both sides are to gain minimal concessions. In the UK’s case, this is to claim minor accommodations from the EU and parade them as a major victory. In the EU’s case, it is so as to be seen to be tough, thereby dissuading others from leaving.
This is game theory in operation, with both sides bluffing that they are prepared to walk away from a deal unless they get what they want, regardless of the harm it will do to your economy, and theirs with it. The differences between negotiating a deal, and walking away with no deal, are starkly different, and, unlike game theory, each side knows the risks to the other.
As a consequence of the continued deadlock the risks of no-deal have risen, and this has in part been why the pound has dropped back below $1.30 against the US dollar.
So what do the probabilities now look like?
No deal is more probable than deal, 55% to 45%, but it is still pretty much a coin flip as to whether a basic free trade agreement can be signed ahead of year end. What aren’t uniform are the likely market and economic responses associated with those different outcomes.
On the back of no deal, the UK economy could suffer an additional 5% drop in GDP, the Irish economy could suffer a double digit (10%+) drop in its output, and Eurozone could endure a drop of around 1% of GDP. That, at a time when economies are still dealing with the hangover from the pandemic shutdowns, could setback recoveries multiple quarters, if not years.
The pound could drop as low as $1.15 and €1.03, with the Bank of England sanctioning negative interest rates (-0.25%) and an additional £500bn added to the asset purchase programme to limit any economic damage, and the need for more public spending.
If a deal is done, the market and economic response is much more limited, but constructive. GDP growth in the UK could be lifted by between 0.5 & 1 percentage point, prompted by stronger investment flows, whilst Ireland could enjoy double that. Interest rates will not need to be cut, but there is room for another £100bn of quantitative easing, to help with the COVID recovery.
As for the FX markets, the pound could rally modestly to $1.33 and €1.13, with markets and businesses breathing a sigh of relief that no additional major changes to operations will be required.
Talks aren’t going to extend beyond the end of the year, but the implementation period of any new regime could stretch beyond the end of 2020, to ensure the smooth operation of trade once the deal goes ‘live’.
With the UK and Europe already beset by substantial economic challenges, both sides should put all their efforts into agreeing a deal, and re-focus attention back on dealing with the evolution of the coronavirus, and the threats to recovery that may pose.
A UK winter lockdown?
The recent rise in coronavirus cases across the UK and Europe has prompted a series of localised restrictions and lockdowns, but so far no government has called for a complete lockdown of their country, and thereby most of their economy.
Economically, another lockdown in the UK would be devastating. Firstly for the public finances, with the deficit already expected to exceed £350bn this year. Secondly for the economy, which is still yet to get back to close to normal, with a variety of services based industries, ravaged by the first lockdown, yet to return to full operation.
Such a lockdown would, most likely, require additional fiscal support, prompt the Bank of England to offer hundreds of billions of extra asset purchases, and likely lead to negative interest rates, to tackle further deflationary pressures.
However, the flip side, away from the economic cost of a lockdown, is the cost in lives lost if a lockdown was not implemented. This is a trade-off no government, no parliament, would wish to make.
At the moment, aside from watching the daily new case numbers, there is also a lot of interest in the numbers of new hospital admissions, the age demographic of those being infected, and the severity of those infections. It is worth noting that the age brackets of the majority of those being infected are under the age of 35, and coincide with a return to school and university and the return to work also.
These health based figures will inform the decisions of not only the government, or rather the four governments of the United Kingdom, as to whether or not to lockdown. Unless the health system looks as if it will become overwhelmed, and that includes the re-opening of the Nightingale hospitals, the governments will try and keep the economy running, as best it can.
For retail, the late autumn and early winter period is critical to the sector’s full year performance. The lockdown saw a switch away from in-store to online (see chart), which would no doubt re-emerge, but still it would be likely that the overall retail spending would drop sharply versus a year ago, perhaps by as much as 10%, despite a lack of spending alternatives.
Consumers, faced with additional job uncertainty, would likely restrain spending impulses.
Source: Office for National Statistics
The overseas travel business remains operating a fraction of what it has done in previous years. The UK sees few destinations operating without quarantine restrictions from the Foreign and Commonwealth Office. The prospect of destinations for winter sun and the upcoming ski season remaining on the quarantine list in the coming months would be a body blow for the beleaguered sector. That could lead to renewed calls for government bailouts in order to prevent further job losses.
Not all businesses are performing badly however, with online retailers, logistics businesses, supermarkets, DIY, healthcare and medical companies all seeing sharp increases in volumes and values.
The government will try and avoid another lockdown, but will have to hope that new case numbers level out and start to drop.
The UK economy can little afford another lockdown or a no-deal Brexit. The government has significant influence over the outcome of the Brexit negotiations, but less influence over the evolution of the coronavirus. With a deal within their grasp, they should redouble their efforts to getting agreement, so as to alleviate the pressure on UK plc from elsewhere.
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