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Ahead of the curve: Economic consequences of the chaotic developments before the US elections

September 10, 2020

A commentary by Jürgen Lukasser, Chief Investment Officer LGT Bank Österreich, on the shocking news that US President Donald Trump has fallen ill with the corona virus and how this is causing considerable uncertainty in view of the US elections on November 3.

Ahead of the curve: Economic consequences of the chaotic developments before the US elections

The last few weeks held several surprises in store, with the US president's illness being certainly the most serious. Recently, we have tried to draw scenarios for possible election results and their impact on the capital markets. These are now largely a waste of time. At this point we can simply wish Donald Trump a quick recovery.

What influence could current events have on the outcome of the election? When British Prime Minister Boris Johnson was infected with Covid in the spring of 2020 and the disease took a serious course, the country ruled with a wave of sympathy - even though this has since subsided considerably. Could Donald Trump expect a similar development? Boris Johnson retired from day-to-day business for a while. Is that even a serious option about a month before the election? The current developments will undoubtedly have economic consequences.

At this point we will try to assess the most important consequences:

From an economic point of view, the current developments appear to be highly likely to have a negative character, as the formation of clusters in the White House makes a further easing of the initial restrictions very unlikely. It was certainly much easier to argue for a relaxation of the measures when broad sections of the population considered these measures to be completely exaggerated. It is very likely that this assessment is currently changing. On an individual level, this would lead to a change in behavior, regardless of official rules and regulations.

On the other hand, the chances of a further fiscal stimulus appear to have increased significantly. Democrats and Republicans are called upon to make the appropriate public sector contribution to the situation.  It seems very likely that the challenges posed by the pandemic are currently being taken much more seriously than just a few weeks ago. A continuing weak labor market also points in this direction. However, the actual US president has indicated that he is not prepared to enter into further negotiations with the Democrats before the election.

For the stock markets, volatility is expected to increase. This environment could once again lead to quality stocks performing better than the rest of the market. Before Donald Trump's illness, both the TV debate between the current president and his challenger and the Democrats' possible win of the Senate seat for Iowa indicated that the chances for Joe Biden would improve. However, the stock markets had hardly reacted to these developments. Thus, the market seems to have already discounted the possibility of a Biden victory.

 

The situation is particularly interesting for the US dollar. Can the greenback serve as a safe haven in the current situation, even if the uncertainty emanates from the USA itself, as is currently the case? Arguments for a prolonged period of weakness of the US dollar have often been listed. Extremely low interest rates in the USA and an economic recovery in Europe were frequently cited in this context. Is this good news? A weaker dollar takes pressure off the emerging markets, whose currencies are much weaker against the dollar than the major G-10 currencies. It also helps make American exports more competitive and increases US inventories by raising dollar valued overseas earnings. These developments are estimated by the current leadership in Washington as positive. On the other hand, there is also the concern that a weaker dollar will further increase the imbalance of a world that is already very unbalanced. A weak dollar would tend to increase US inflation through rising import prices, while the deflationary problems of those countries that export to the USA would become even more acute. The US Federal Reserve is currently keeping a conspicuously low profile with comments on this topic. Whereas in the past it was clearly stated that the Fed was unhappy with a strong greenback, today it is merely emphasizing the risk of importing foreign crises.

 

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