How the U.S. election could affect Europe’s markets, economy and trade
1. Market uncertainty
The possibility of a contested election is being underestimated by markets, according to Steen Jakobsen, chief economist at Saxo Bank, and his team.
“We fear that the U.S. election is the biggest political risk we have seen in several decades,” Jakobsen said in a note last week. He outlined three probabilities between now and Inauguration Day on Jan. 20, 2021: a contested election, with a probability of 50%; a clean sweep by Democrat nominee Joe Biden, with a probability 25%; and a win by incumbent President Donald Trump, with a probability of 25%.
2. Trade war?
Another issue at stake is trade. If Trump is re-elected there are fears he could start a trade war with Europe, as he has previously threatened to do, claiming last year that Europe has “in many ways” treated the U.S. “worse” than China.
A trade war would be damaging to both the European and U.S. economies, though the EU stands to lose more if tariffs are imposed on its exports to the States.
3. Tax hikes
A victory for Biden could bring with it another challenge for Europe, however, according to Schmieding. He said that a “blue wave” Democratic sweep could “potentially pave the way for major tax hikes in the U.S. and excessive labor market regulations that may curtail U.S. trend growth and affect export-oriented Europe.”
He said that Biden as president may undo Trump tax cuts, add further tax increases and pursue an expansionary spending and social policy.
“Many observers would see this as negative for markets and U.S. trend growth. Given the importance of the U.S. for the global and European economy and its markets, this could potentially have negative repercussions beyond the U.S.,” Schmieding added.
4. Biden boost?
UBS Asset Management’s strategic asset allocation team said the a Biden-led increase in taxes and public spending could give markets outside the U.S. a boost.
A Biden victory would be positive for equity markets outside the U.S., they noted. “We ascribe 75% odds to Democratic nominee Joe Biden winning the presidency ... This outcome is likely to be associated with a weaker dollar and better relative performance for equities outside the U.S.,” they said.
“Any lack of immediate clarity on the election outcomes would not be a positive for risk assets, but we are not convinced that this dynamic is a reason to substantially reduce such exposures. That this volatility already appears to be priced in raises the bar for any political disruption to meaningfully roil markets.”
Reference: CNBC
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