With less than four months to go before the U.S. elections, financial markets have begun to prepare for the outcome. The more we get closer to the election date, the more sensible the market will become to anything offering a clue about who will be in charge of the White House for the next four years. 

So far, two crowded trades appear on the horizon – long the stock market and short the USD. How will the election impact the two?

Is A Risk-Off Move in Cards?

The coronavirus crisis revealed the extent the authorities are willing to go to when it comes to finding the tools to stop the economic impact. On the one hand, the monetary policymakers flooded the markets with cheap money. Interest rates fell across the world, with many jurisdictions keeping them in negative territory. Fixed income yields fell as a consequence. Investors were left with the stock market.

On the other hand, fiscal stimulus accompanied the central bankers’ easing. In the United States alone, Americans received $600 weekly checks to help them better cope with the crisis.

Most of these newly available money went to the stock market. Instead of being spent in the real economy, it went into stocks, propelled by a new class of investors willing to take risks at extremely high stock market valuation levels.

However, now the fiscal stimulus has stopped. The risk is that if Congress fails to compromise on a new fiscal stimulus, a risk-off episode in the near term may appear. Fiscal relief is still needed, and financial markets feel complacent – especially during an election year.

Increasing evidence suggests that the U.S.- China war moved on the FX space. At a time when the dollar declined across the board, there is mounting evidence that the Chinese were buying gold denominated in USD to dampen the weak USD effect.

If Trump wins a second term, the U.S. – China relationships are likely to continue to be tense. Financial markets have learned so far to cope with the uncertainty of Trump’s administration – will they do the same for another four years?

If Biden wins, the chances are that the new administration will reverse many of the Trump administration’s decisions. The market may view them proactively and may shoot higher.

The wild card in this election year is the pandemic. Any developments in the COVID-19 crisis are likely to influence markets even more than the upcoming U.S. Presidential election.