Less than a month away from the US election day on November 5th, the market is beginning to price in the risk of the election results. Currently, Trump has regained a leading advantage, adding uncertainty to the election. China International Capital Corporation believes that for future assets, the overall election is bullish for US stocks but tariffs are unfavorable for Chinese assets; the US dollar is relatively strong, gold is neutral, interest rates are rising; bulk commodities may benefit from expectations of Trump's stimulus.
With only 3 weeks left until the US election on November 5th, the potential risks the election results may bring to the market have already been factored into by traders.
Goldman Sachs trader Brian Garrett released a report today stating that the VIX index of panic is still at a high level. Especially with the S&P hitting historical highs, the VIX index is still above 20, a very rare situation.
At this moment, a turnaround in the election is happening. China's Liu Gang team stated that Harris, who previously had strong momentum, has been overtaken by Trump. Not only has the betting odds reversed, but Harris is behind in all 6 key swing states, further adding uncertainty.
According to the Goldman Sachs report, the basket of indices compiled by the bank betting on a Republican victory has recently soared to historic highs, while the basket betting on a Democratic victory continues to decline.
The report states:
"A Trump victory is likely to have a positive impact on risk sentiment, but more at the expense of Europe and other regions worldwide, benefiting US assets. In our view, the overall environment for risk assets remains positive."
Goldman Sachs has previously stated that based on the sensitivity of the Republican policy excess return fund (24REPL) to the election event during the 'Trump Trade' frenzy this summer, if Trump eventually wins the presidential election, the fund is expected to rise by 8%.
UBS Group has also identified a similar trend. As recent election polling data shifts towards the Republicans, the basket of indices launched by the bank betting on a Republican victory continues to outperform the basket betting on a Democratic victory, with a cumulative increase of nearly 6% over the past five trading days.
What is the impact on assets?
China International Capital Corporation (CICC) indicates that whether the president can gain congressional support after the election, especially the support of the House of Representatives which leads fiscal and tax policies, will directly affect the smooth progress of relevant policies.
Combining the latest polls, CICC has summarized four possible scenarios:
Republican sweep (39%): Trump is elected and both the Senate and the House of Representatives are controlled by the Republicans, similar to Trump's election in 2016. This scenario is more favorable for advancing Trump's policy proposals, especially tax cuts and other fiscal policies;
Democratic sweep (18%): Harris is elected and both the Senate and the House of Representatives are controlled by the Democrats, similar to Obama's election in 2008. The advancement of Harris's fiscal policies would be smoother in this scenario;
Trump + Democratic House of Representatives (13%): Similar to the situation after the 2018 midterm elections, President Trump and the Democratic Party, which dominates the House of Representatives, are in opposition. Trump faces greater difficulty in advancing fiscal and tax policies in this situation, so it is not ruled out that he may first advance trade policies such as tariffs through administrative means.
Harris + Republican House of Representatives (5%): Similar to the situation since the 2022 midterm elections, President Biden and the Republican Party, which dominates the House of Representatives, are in opposition. Harris finds it difficult to advance fiscal and tax policies, with governance space blocked, and may focus on continuing Biden's policies and adjusting administrative execution methods.
In assessing the impact of the election on assets, CICC believes that besides the differences in policies between Trump and Harris themselves, the sequence of policy implementation also has a direct impact. The overall most probable direction is: overall bullish for US stocks but tariffs unfavorable for Chinese assets; the US dollar is biased stronger, gold neutral, interest rates trending upwards; bulk commodities may benefit from the expectations of Trump's stimulus.
A "Republican Party sweep" in the US stock market may be even better, while a combination of "Trump + Democratic Party" may cause inflation disturbances, and a "Democratic Party sweep" may bring tax pressure.
Overall, US bond yields are under upward pressure, with Trump facing even greater pressure; the US dollar is biased stronger, gold neutral, and uncertainty stems from administrative intervention to devalue and risk-aversion driving demand for gold.
Trump's policy stimulus may be beneficial for commodities despite supply constraints, which may also be favorable for long-term demand.
Trump's tariffs may be unfavorable for Chinese assets.
