What to expect from the US election

The stakes are high and the expected outcome far from clear when it comes to the US presidential election in November. Nordea Research analysts outline three possible scenarios and their implications for the economy and financial markets.

All eyes are on the US presidential election, with a less than a month to go before American voters cast their ballots on November 3. Keeping the economy open versus another lockdown; an escalating trade war versus more negotiations; further deregulation versus tax hikes – these are just some of the issues distinguishing Republican incumbent Donald Trump from Democratic challenger Joe Biden.

“The election will be extremely interesting, and the stakes are much higher than in a normal election year. We think the race is much closer than the polls imply, and even if a Biden victory is the most likely outcome, such a scenario is far from a given,” says Chief Analyst Jan von Gerich.

While the presidential race is the main headliner, it will also be critical to watch the Congressional elections, says von Gerich, as the resulting political balance in Congress will determine what the winner is able to do as president.

Von Gerich and his Nordea Research colleagues recently published an election preview, laying out three potential scenarios for the outcome of the vote as well as the implications for the economy and financial markets.

We think the race is much closer than the polls imply, and even if a Biden victory is the most likely outcome, such a scenario is far from a given.

Nordea Chief Analyst Jan von Gerich

Presidential Candidate Joe Biden Holds A Town Hall At Lander University In South Carolina

Democratic presidential candidate, former vice President Joe Biden speaks to the audience during a town hall on November 21, 2019 in Greenwood, South Carolina. (Photo by Sean Rayford/Getty Images)

Three scenarios for the US election outcome

While Biden is clearly ahead in national polls, if there’s one thing the 2016 election taught us, it’s that the national vote doesn’t determine who wins the election. (Recall that Hillary Clinton won close to 3 million more votes than Trump in 2016 but lost the electoral college after Trump prevailed in critical swing states.) Nevertheless, the Nordea analysts see a Biden victory as the most likely outcome.

1. A Biden win, with Democrats gaining a majority in the Senate (and retaining control in the House of Representatives) – 40% probability

Of the scenarios, the analysts see a sweep for the Democrats as the most likely.

“In this scenario, Biden and the Democrats would probably introduce a sizable fiscal easing package in early 2021, assuming the economy would still be significantly burdened by Covid-19,” von Gerich says. Biden would likely seek to increase investments in the housing market, social security and healthcare while reversing some of Trump’s tax cuts and his deregulation agenda, especially regarding climate, he adds.

The tax hike aspects of Biden’s agenda could put some pressure on US equity markets, but the sizable fiscal stimulus should help offset that, at least in the short term, according to the Nordea analysts.

They expect Biden would maintain a harsh stance towards China while trying to patch up relations with the EU. The result would be a more stable global trade environment, which would support a weaker USD and a clearly higher EUR/USD, and European assets should perform versus US ones, they say.

2. Trump wins; Congress remains divided – 30% probability

The status quo – a second Trump term, Republicans retaining control over the Senate and Democrats the House – is another viable outcome, according to the Nordea analysts. In that situation, Trump would favour more tax cuts, deregulation and a more limited stimulus package. While the Democratic House would likely block most of these plans, Trump could push through some more deregulation using his presidential powers. An agreement on a more limited stimulus package could also be reached, including some infrastructure investments, according to the analysts.

“A Trump victory would likely make global trade policy even more uncertain, supporting the USD. EUR/USD would drop, especially if tariffs on European cars come back on Trump’s agenda,” says von Gerich.

While risk sentiment could get a small boost after the election uncertainty passes, an escalation in the trade war and Trump’s unpredictability could dent risk appetite longer out.

3. Biden wins, but Republicans retain control over the Senate and Democrats the House – 20% probability

In the scenario of a Biden win and a divided Congress, an agreement on more limited fiscal stimulus could probably be reached, but the Republicans would likely block tax hikes and a big part of the spending increases Biden is planning, according to the analysts.

“The impact on risk appetite would probably be more muted, but the trade policy consequences would mean a weaker USD, higher EUR/USD and European assets performing versus US ones,” says von Gerich.

A Trump victory would likely make global trade policy even more uncertain, supporting the USD. EUR/USD would drop, especially if tariffs on European cars come back on Trump’s agenda.

Nordea Chief Analyst Jan von Gerich

Donald Trump Holds "Keep America Great" Campaign Rally In Dallas

U.S. President Donald Trump speaks during a "Keep America Great" Campaign Rally at American Airlines Center on October 17, 2019 in Dallas, Texas. (Photo by Tom Pennington/Getty Images)

Biden victory: Bad for the USD, good for emerging markets and the AUD

While Biden’s trade policies would likely weaken the USD and drive EUR/USD higher, a Biden victory would likely be good news for emerging markets currencies as well as the Australian dollar, according to Nordea Global Strategist Andreas Steno Larsen.

When asked what currencies he would buy after the election in an interview on Bloomberg Daybreak on October 5, Steno Larsen said emerging markets.

“I think it’s a really good time to buy emerging markets if Joe Biden wins. When world trade rebounds, dollar liquidity is added to emerging markets via trade flows,” he said. Steno Larsen also pointed to the Australian dollar as a good buy in the event of a Biden victory, given its ties to the emerging markets outlook. Watch the clip on Bloomberg Daybreak.

For more on the US election and its consequences, read Nordea Research’s full election preview, including what happens if there’s no clear election result, the effect of the vacant Supreme Court seat and what to expect from the US-China trade war.


Front page image: Television screens airing the first presidential debate are seen at Walters Sports Bar on September 29, 2020 in Washington, United States. Americans across the country tuned in to the first presidential debate between Donald Trump and Joe Biden held in Cleveland. (Photo by Sarah Silbiger/Getty Images)

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