What could a Blue Wave US election mean for markets?

What is a ‘Blue Wave / Blue Sweep’ election victory?

A blue wave or blue sweep, refers to the election outcome whereby the Democrats win the Presidency, the Senate and the House of representatives. The Senate and House of representatives make up Congress which is responsible for the writing and passage of legislature within the US. This legislature if approved by the president is then written into law.

Currently the Democrats have majority in the House of Representatives, while the Republicans currently have majority control in the Senate.

Having one party controlling the presidency and congress would make it easier for government to obtain budget and legislature approval.

Is a ‘Blue Sweep’ election outcome likely?

Polling data (with the absence of a few swing states) is suggesting that Joe Biden is likely to win the US election, while the Democrats are also favoured to retain the House and take over the Senate. However if previous polling data has taught us anything (from events such as the Brexit vote and the 2016 US elections), is that these outcomes are still far from a foregone conclusion.

What would a Joe Biden victory suggest about policy?

A Biden lead Democratic policy agenda does look to unwind much of the Trump era policies, amongst which would include the reversing of Trump’s tax cuts and immigration policies, while also looking to restore international alliances. A blue sweep also suggests a substantial increase in government spending which would include increased Covid aid to small businesses and citizens as well as a sizeable increase the Federal wages.

What would this mean for markets?

The US Dollar

A democrat victory is expectant of a weaker dollar, this has been evidenced by the greenback softening as polling data has started to show an increased probability of a Biden victory. A Biden victory is suggestive of increased government spend and the prospect of a larger covid aid stimulus package, considered negative for the US dollar. However Fed policy and the economic outlook will remain key for the US dollar irrespective of who the president will be. In both scenario’s it is likely that lending rates in the world’s largest economy will remain extremely accommodative well into the next presidents election term, which is in isolation bearish for the greenback.

US Bonds

Markets have indicated that a Biden lead administration could be favourable for economic growth and inflation. This would suggest a steepening of the yield curve, meaning that the spread between short term and long term bond yields starts to increase.

Equity markets

US equity markets which can attribute much of 2019’s gains to Trump’s tax cuts, will see at least a partial reversal of the tax relief by Joe Biden should he win the 2020 US elections. This would in turn be considered a negative for business and reflect in share prices. However it is expected that the increased government spending suggested by the democrats could more than offset the unwinding of Trump era tax cuts. The US technology sector could be negatively affected by a blue wave victory through proposals to increase offshore taxes by more than 100%. Biden’s support for renewable energy and greener initiatives could see stocks such as Tesla medium term beneficiaries.

International Equities

Mr Biden has indicated that he would also challenge China in a number of areas regarding trade and environmental issues. However this is not expected to manifest in the form of another tit for tat tariff war, but rather through further work with US allies. This is suggested to be beneficial to Asian business and in turn equity markets.

Other material trade partners with the US which include, Canada, Mexico and Europe are also more likely to benefit from a more diplomatic, less aggressive approach to the trade narrative, however Mr Biden has indicated a harder stance on Russia (possibly even sanctions) which would bode negatively for business within the region.

Emerging market currencies

A softer dollar and search for higher yield in a low global yield environment is expected to benefit a number of emerging market currencies. The prospect of a global recovery further benefits the risk on trade which would encourage inflow to emerging markets to strengthen their respective currencies. So far, as we have seen the Democrats taking the lead at the polls, currencies such as the Chinese Yuan, Mexican Peso and South African rand have all firmed against the greenback. However the Turkish Lira and Russian Ruble have in fact weakened on the increasing geopolitical tensions and the prospect of renewed sanctions by the US.