Four scenarios for the US elections

US elections, always consequential, have seldom been associated with as much uncertainty and dread about their outcome and implications. Firstly, the nation is highly polarised along pro- and anti-Donald Trump lines. Secondly, the coronavirus pandemic has caused enormous economic and social stress, while the debate over its management has unfortunately become a political one. Additionally, race, law enforcement, and equity related tensions have surfaced into civil protests, sometimes violent.

Ominously, Americans have been buying guns in record quantities. Whether this reflects fears of forthcoming restrictions on gun rights or taking precaution against expected civil unrest, it’s an uncomfortable phenomenon in a nation already afflicted by considerable gun violence.

Polls and betting markets are providing signals of Joe Biden to be the next US president. The widely followed fivethirtyeight.com has assigned a 90% probability of a Biden win, while the RealClearPolitics site has Biden leading by 7.8% in national averages and by 3.6% in battleground states. Donald Trump would have to pull off a far bigger come-from-behind sprint than he achieved in 2016 to win this election, as per the polls. The Democratic party is also expected to take over the Senate, although survey and market implied probability is lower.

Let’s consider the four scenarios ahead:

A Blue Wave

Democrats in control of all key layers of the government would pave the way for expectations of a large economic stimulus, increased spending on the greening of the economy, higher corporate and personal income tax rates (for the wealthy), and other progressive measures. This scenario would likely be associated with a sharp curve steepening and USD selloff, in our view.

Biden minus the Senate

President Biden without the Senate in his party’s control would force him to reach across the aisle to Republicans for some policy compromises, which may well cheer the stock market, as the spectre of higher taxes fades.

Trump’s astonishing comeback

Were Donald Trump to be re-elected, we would not expect his agenda to become softer. His anti-institutional pursuit will be strengthened by the second term mandate, which will affect multilateralism worldwide, while politicising the civil service and judiciary at home. We think that antagonism toward China will deepen, putting Chinese asset markets under pressure. 

A contested election

There are several factors at play that could delay the election outcome. Some battleground states, subject to a record number of absentee ballots this year, may take more than a day to count all votes. Partisan fights over which ballots to count and within which period could break out in states, dragging the matter to courts. President Trump could refuse to accept the result under the pretext of voter-fraud. The resulting civil unrest could be unlike anything the US has witnessed since the 1960s. As for markets, we would expect risk aversion to soar.

We look forward to a peaceful and expeditiously concluded election in the world’s largest economy. The stakes are high not just for the Americans, but also for the rest of the world. Afflicted by a once-in-a-century pandemic and deep economic contraction, another front of instability would be highly disruptive for the global outlook.