Markets are contending with greater uncertainty around the US
presidential election following President Biden’s withdrawal. Our
Global Head of Fixed Income and Thematic Research breaks down
what we know as the campaign enters a new phase.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan
Stanley's Global Head of Fixed Income and Thematic Research.
Along with my colleagues bringing you a variety of perspectives,
today I'll be talking about the latest development in the US
presidential race.
It's Thursday, July 25th at 2:30 pm in New York.
Last weekend, when President Biden decided not to seek
re-election, it begged some questions from investors.
First, with a new candidate at the top of the ticket, are there
new policy impacts, and potential market effects, resulting from
Democrats winning that we haven’t previously considered?
For the moment, we think the answer is no. Consider Vice
President Harris. Her policy positions are similar to
Biden’s on key issues of importance to markets. And even if
they weren’t, the details of key legislative policies in a
Democratic win scenario will likely be shaped by the party’s
elected officials overall. So, our guidance for market
impacts that investors should watch for in the event that
Democrats win the White House is unchanged.
Second, what does it mean for the state of the race? After
all, markets in the past couple of weeks began anticipating a
stronger possibility of Republican victory. It was visible in
stronger performance in small cap stocks, which our equity
strategy team credited to investors seeing greater benefits in
that sector from more aggressive tax cuts under possible
Republican governance.
It was also visible in steeper yield curves, which could reflect
both weaker growth prospects due to tariff risks, pushing shorter
maturity yields lower, and greater long-term uncertainty on
economic growth, inflation, and bond supply from higher US
deficits – something that could push longer-maturity Treasury
yields relatively higher. So, it's understandable that investors
could question the durability of these market moves if the race
appeared more competitive.
But the honest answer here is that it's too early to know how the
race has changed. As imperfect as they are, polls are still our
best tool to gauge public sentiment. And there’s scant polling on
Democratic candidates not named Biden. So, on the question of
which candidate more likely enjoys sufficient voter support to
win the election, it could be days or weeks before we have
reliable information. That said, prediction markets are
communicating that they expect the race to tighten – pricing
President Trump’s probability of regaining the White House at
about 60-65 per cent, down from a recent high of 75-80 per
cent.
So bottom line, a change in the Democratic ticket hasn’t changed
the very real policy stakes in this election. We’ll keep you
informed here of how it's impacting our outlook for
markets.
Thanks for listening. If you enjoy the podcast, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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