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President Biden’s ‘surprise’ announcement was so swiftly followed by ready-prepped political obituaries, Kamala Harris profiles, look-back photo essays and replays of gaffs at the lectern that you could be forgiven for thinking that a sunny Sunday afternoon was when the UK press does all its work. In truth, further calls over the weekend from senior Democrats for Biden to resign and disastrous polling data from Michigan were just the latest updates in a lengthy political drama that saw the number of potential outcomes dwindle daily.

What should markets make of the finer points? Here, Brian Daingerfield, Head of G10 FX Strategy, shares his insights.

Biden’s endorsement of Harris gave her a leg up to succeed him, and carried weight

Endorsements from top members of the Democratic Party, including former leadership such as Nancy Pelosi, and Bill and Hillary Clinton, went a long way towards shaping the fate of the nominee. This process had already started by the end of Sunday and concluded by the end of Monday.

For policy, we think Biden dropping from the race is not material

In terms of market-relevant policy, Harris is unlikely to differ sharply from Biden and the core Democratic policy platform is largely shared across the party. The largest source of interparty difference may come from foreign policy, which is the theatre in which the President plays a major role. We think the largest potential source of differentiation is the Israel / Hamas War.

For markets, a bump for Democrats may be the first response

It’s not obvious from underlying polling data that Harris would fare significantly better than the President against Trump. But we observed in our conversations with customers in the past week, particularly considering the assassination attempt of former President Trump, that a Trump win / Biden loss was starting to feel inevitable. Regardless of whether Harris is nominally stronger than Biden, at this point a non-Biden choice probably helps more than hurts.

Don’t forget about down-ballot races

Polls consistently tell us that the House and Senate contests are close, and on a generic ballot basis (which asks voters to choose between Democrats and Republicans regardless of the specific candidate) the populace is evenly split. Biden’s status as a weight on down-ballot races was one that we had not (yet) clearly observed in polling. But we should acknowledge the possibility that the nomination drama around Biden will weigh on Democrats down ballot. While an unpopular President is no longer running, Harris as nominee may not help much.

Trump is still the market favourite

Donald Trump’s lead over Biden in national and swing state polling has been much more consistent than in past cycles, and the state of the economy (including potential signs of a moderating employment market) may weigh on the Democrat nominee. It goes without saying that near-term polls will take on greater influence as markets assess if Trump’s standing has shifted versus a new, younger Democratic challenger. 

 

After the election: Our views of what might happen

Outcome

Economic and market reaction

(A Democratic President, House and Senate)

Probability: 5%

Legislative space for tax changes (hikes) and new social spending. Higher fiscal spending, which likely reads higher US rates, but we assume less than in Republican sweep.

Higher corporate and top tax rates.

Markets outcome: Higher US rates and a weaker USD

(Democratic President + Republican Senate and/or House)

Probability: 30%

Democratic president limited on tax and spending. Debt limit fights remain tense. Regulatory + ESG policies remain.

Markets outcome: Yields lower / curve flatter, and a weaker USD  

(Trump + Democratic Senate and/or House)

Probability: 45%

More of the “bad Trump” (trade war) and less of the “good Trump” (tax cuts and stimulus). Lighter regulation, lower taxes, generally "business friendly".

Greater geopolitical uncertainty + worries of Fed independence an eventual consideration.

Markets outcome: Yields flatten (due to less fiscal stimulus), and a stronger USD   

(Trump + Republican House and Senate)

Probability: 20%

Agenda of “more” – more tax cuts, more stimulus. We don’t buy that Republican fiscal discipline stops Trump. Trade war risk returns with force. Inflationary.

Significant new fiscal spending expectations, including tax cuts.

Markets outcome: Yields increase, and a stronger USD   

Source: NatWest Expectations

 

 

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