What Impact Could the US Election Have on Stocks and Bonds?

The US election will undoubtedly influence stock markets and government bonds. Here’s an in-depth analysis of how these financial instruments may react to various election outcomes.

Navigating Market Volatility Ahead of the US Presidential Election

Markets have been gearing up for the US presidential election throughout the month, with increasing uncertainties resulting in notable volatility.

The tight race between Trump and Harris has prompted investors to seek safe-haven assets and hedge against potential risks. However, neither the "Trump Trade" nor the "Harris Trade" guarantees safety, as it will ultimately be the implementation of post-election policies that determines market trends.

When a clear outcome is announced, an immediate market reaction could be a reversal.

Michael Brown, Senior Research Strategist at Pepperstone London, emphasized that "the biggest boost for risk, regardless of the winner, would be the certainty of the result."

He added: "Markets continually crave certainty, which such a result would provide, and allow those who have hedged election-related risk to unwind those positions and re-enter the fray."

Stock Markets Poised for Recovery After Sell-Offs

Global stock markets are anticipated to face increased volatility during voting hours on November 5, reminiscent of the reactions observed during the Brexit referendum and the 2016 US election. In the previous US election, markets experienced a sell-off ahead of Election Day but rebounded following Trump's victory speech.

While history doesn't always repeat itself, recent trends indicate notable similarities.

The CBOE Volatility Index, a key gauge for hedging risks, surged by 35% in October as investors sought higher risk premiums.

Continued Bearish Trend in Bonds

US government bonds experienced significant sell-offs in October due to two main factors.

First, the job data from September indicated that the US labor market was stronger than anticipated. After the Fed’s substantial rate cut in September, bond prices initially rose as yields fell, reflecting the inverse relationship between yields and bond prices.

However, the market has since revised its expectations regarding further Fed cuts, anticipating a more gradual approach. This shift has led to rising yields and subsequent sell-offs in bonds.

Secondly, the "Trump Trade" has significantly influenced the rise in US Treasury yields, as his policies are anticipated to drive inflation higher, leading the Fed to slow its pace of rate cuts. Bond yields, particularly on shorter-term notes, often reflect market expectations regarding interest rate movements.

A Trump victory could exacerbate sell-offs in bonds, as his policies are likely to increase the budget deficit and elevate inflationary pressures, prompting the Fed to curtail its rate-cutting strategy.

Conversely, a Harris presidency wouldn’t necessarily have an opposing effect on the bond market, as her policies could also contribute to rising government debt and deficits, albeit potentially to a lesser degree.

The most favorable scenario for bonds might be a divided Congress, which could help contain excessive government spending and alleviate inflationary pressures.

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.