A full trading day later, the dust has settled on the market effect of the US presidential debate on Tuesday night. After all the incisive headlines playing up the effects, the main takeaway from the debate as far as the markets are concerned is: Data trumps politics.
There was some fluctuation in the markets in the immediate aftermath of the Presidential Debate, with the dollar notably getting weaker. But that was against a basket of currencies that includes the yen, which got substantially stronger while BOJ board member Nakagawa was speaking and giving her assessment of Japanese monetary policy. With both candidates effectively tied in the polls (within the margin of error of the polling average) the main market effect coming from the political campaign is uncertainty.
Markets Like to Know What’s Going On
Both candidates are advancing policies meant to woo voters, but there is a big difference between campaign pledges and actual governance. A parallel can be found in the UK, where Labour – leading in the polls by far – sought to calm markets by anticipating no major changes in fiscal policy once they won the election. Yet here we are a couple of months after the voting is over, and the new Budget is debating adding additional taxes.
With a narrow margin in voting intention between the candidates, both will be a lot more likely to come up with and announce new policy proposals. Trump’s more recent idea to eliminate income taxes and replace them with tariffs would potentially have the biggest impact in how markets operate. Harris’ proposal on wealth tax would also be viewed unfavorably by markets – except it’s a proposal that is often brought up by Democrat candidates that never gains traction once they are in office. Either way, these kinds of proposals make the markets a little more nervous.
Where the Big Influence Lies
Overall, however, the result of the Presidential Debate does provide some indication of how markets might react if one or the other were to gain a substantial lead in the polls. Or when one of them wins in November. Betting odds favored Harris after the debate, and the dollar weakened slightly.
The perception in the markets is that if the Vice President were to win, then the status quo would likely continue. And the expectation is for further easing as the economy is seen slowing slightly and inflation comes into line. Modest economic growth that doesn’t push inflation higher is one of the better outcomes for the stock market, and weighing on the dollar.
What Shocks to Look Out For
A Trump victory is generally understood to potentially impact the Fed’s trajectory as the candidate has promised to replace the head of the central bank. The relative uncertainty of a Trump White House, backed by Republicans keen on cutting spending, seems to be interpreted as detrimental to stock market growth. The conclusion is more interest in safe havens, like the dollar, as yields in Treasuries are expected to remain higher.
The current election cycle, however, has seen extraordinary events that elevate the uncertainty. That includes the leading candidate for the Democratic party dropping out right before the convention. Other events that heighten the uncertainty of who will win, or increase the certainty, will likely have marginal effects on the market going forward. In the meantime, data remains in focus as we count the days to the pivotal Fed meeting of September.
