*Mt thoughts on the result of the U.S. elections, what lies in store for the US dollar and more*
Welcome back to the blog and to a weekend blog post which is actually becoming more and more common recently. It must be a sign of the strange times we are all living in right now. In this post I am going to talk you through my thoughts on why the results were as they were, what lays in store for stocks and the US dollar and some other popular points of discussion.
Lets start with the results as we now know, Joe Biden has been (as good as damn it) elected as the 46th President of the United States of America. This election was actually much closer than many predicted with the “battle” coming down to the last 5 states. As I write this blog post on Sunday afternoon GMT, Joe Biden is winning/has won by 290 electoral votes to Trumps 214.
So how did Donald Trump lose his presidency?
I think ultimately it comes down to one thing and one thing only, for the majority of voters Trump had not done what was promised and Make America Great Again in a way that benefitted them. Biden reminded voters of this. Yes, stock markets are soaring (albeit thanks to heavy stimulus and dollar printing) but this does not benefit the majority of American citizens and in fact the actual economy is not doing too great with unemployment at long term highs, credit defaults climbing monthly and a pandemic that is far but under control.
Unfortunately, much like when the U.K. had to choose between the conservative Boris Johnson and the labour Jeremy Corbyn, the voters have to choose between two candidates who aren’t the first choice and are therefore stuck between a rock and a hard place. During the lead up to the election, conspiracy theories were flowing and it came down to two generic facts… a vote for Trump was a vote for a racist and a vote for Biden was a vote for a paedophile.
I, like many others, thought Trump would still come out on top because it is much better to vote for the devil you know than the devil you don’t. Conspiracy theories aside, with Trump you know what you are going to get (whether you like it or not) yet with Biden there is still a lot of unknowns.
However, if you look at the wider election data, voters actually decided to keep the majority of the republican team in the Senate and the republicans actually increased their ranks in the House of Representatives.
To quote Bloomberg – “In essence, U.S. voters decided to replace their CEO but keep the board of directors intact”.
What does this mean for the financial markets?
I am a financial markets trader, and I imagine most of the readers of this blog have money invested/traded on the global markets. So let’s get in to the good stuff and discuss what might happen to the US dollar and Stocks in the coming weeks, months and years.
As we are all aware, there has been a long running trade war between the U.S. and China and this has still not disappeared. Steel and Aluminium have been subject to tariffs for some time and there no chance of Biden removing these any time soon. It would drive prices through the floor and it would cause a revolt amongst the voters in commodity heavy states that supported Biden in this election.
China is still the biggest importer of Oil and this will therefore likely continue the discussions on the production and exportation of Oil to China. I think that, unlike Trump, Biden will continue to discuss and negotiate deals with China in regards to commodities but in a much less volatile and childish manner. Yes, he may not be as strong willed as Trump but I think we may all see an end to the market moving tweets and subsequent short term volatility caused by them.
A vote for Biden was a vote for clean energy and increased efforts on renewables. Long term this is likely to weigh on Oil prices but it is unlikely that they will crash to anywhere near the lows seen in the pandemic. I think it is more likely that the upside potential for oil will now be limited.
The U.S. Dollar.
A popular opinion of a Biden win was that continued US dollar weakness was almost a certain because of his policies on strong fiscal stimulus. However, according to previous democrat presidents, this is not always a given.
The chart above shows the value of the US dollar vs the Euro and the Yuan along with both the US dollar index (DXY) and the US dollar trade weight index during the Obama/Biden tenure from 2009 – 2017. As you can see, all of these US dollar based instruments ended much higher than when they started which implies US dollar strength.
Looking at the previous democrat tenures, it would be wise to assume the long term rise in dollar like previously seen. However, there are some key difference between then and now. Firstly, and most obvious, there was no coronavirus pandemic back in 2009 through 2017 and this plays a major part because the ability to control interest rates and monetary policy is very restricted now. Obama was also not coming in to presidency following someone as outspoken and as volatile as Donald Trump and this will likely curb market responses to inputs from the new president.
The image below shows the effects of key Donald Trump tweets on the value of the US dollar index in previous years.
Another key point to note is that interest rates are now effectively zero where as the USD back in 2009-2017 was riding high as one of the global rates leading currencies. The chart below shows the EURUSD FX currency daily price chart.
When the coronavirus pandemic hit back in early Q1 2020, the US Fed slashed rates and almost overnight this removed a significant amount of demand for the Dollar that had long term been a part of the markets. The Euro Dollar short carry trade had been a long term profitable trade for funds and investors borrowing at low rates from the Euro and receiving higher rates from the US dollar to net the difference.
If you look at the chart above, you can see the exact moment rates were cut this year and how much money flowed out of the EURUSD short carry trade. The historically low interest rates of the US dollar has now removed the demand “floor” for the currency and this will effect future strength.
The Stock Market.
I think in reality, no one knows exactly what will happen to stocks now Biden is in charge because, like with interest rates and stimulus, his hand is forced by inheriting a country that is currently in the middle of a major pandemic.
There is the potential for stocks to fall if Biden decides to attack the pandemic head on and bring back national or state specific lockdowns like that which is currently happening in the U.K. Tech stocks will likely continue to boom no matter what and renewable and green energy/electric vehicles will likely push upwards as there will be a larger focus on supporting the research and development of these industries.
The IG Wall Street Weekend Index which is a pre-market/out of hours trading of the Dow Jones Index shows little change from Fridays close price. The futures markets open soon and this will give you the a much clearer idea of the short term sentiment on Biden’s win of the election.
Everything written in this blog is my own views and opinions and whenever politics is involved, there is bound to be disagreements and controversy. When Donald Trump is involved, this is going to be a certain.
His team are already calling the election results a fraud and have tried and are still trying to launch multiple legal disputes against voting in multiple states. Although many major news outlets and politicians have called the election finished, the reality is it is not. Although volatility might be reduced now Trump’s twitter account is not as important, do not expect it to die down and disappear overnight.
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