• Joel

Final US Presidential Debate: How Markets Might React

At 0200BST/2100EDT tonight, US President Trump and Democrat Nominee Biden duke it out in the final US Presidential debate ahead of election day on the 3rd of November.

Pretty much everyone will be hoping that this debate goes a little better than the last; Trump and Biden consistently interrupted and derided each other during the last debate, with neither putting in much by way of a “Presidential” showing (although Biden widened his lead in the polls in wake of the debate and was seen as the marginal winner).

This time around the Presidential Debate Committee has decided they will be muting each candidates microphones whilst the other candidate is given the opportunity to answer questions; each candidate will have an uninterrupted 2 minutes to answer each question, or something like that, we have been told.

Today’s debate presents something of a final opportunity for US President Trump to close the gap in national polling and in a number of battleground Swing States; on October the 11th, Biden held a 10.2% lead (on average) in national polling, but this has dropped to 7.7% by the 22nd, a drop that will have the Democrats worrying, but not completely panicking, given that no Presidential Nominee with a national polling lead this large this close to election day has ever failed to secure the nomination.

If Trump does succeed in boosting his rating in the polls following tonight’s debate, this will undoubtedly be a risk appetite negative (stocks down, USD up) given that 1) it raises the chances of a close election, which Trump would almost certainly dispute, resulting in a prolonged period of political uncertainty, the kind of uncertainty that markets HATE (and likely would cause civil unrest in the US) and 2) it reduces the chance of BIG Democrat stimulus in 2021 upon the hoped for inauguration of Biden.

Conversely, if the opposite happens and Biden widens his lead even further, this ought to be risk appetite positive (stocks up, USD down), as markets have settled on the idea that big Democrat stimulus outweighs any negatives brought about by Democrat tax hikes/higher regulations, all while Biden is expected to adopt more conciliatory foreign policy.

So looking at tonight’s debate, how might markets react?

The reaction will largely be determined by the above, or, in other words, how traders assume tonight’s debate will influence the polling going into the election;

1) If Biden is seen as the winner, it is likely he will see a boost in the polls and this ought to be risk appetite positive for the reasons explained above.

2) If Trump is seen as the winner, he will also likely see a boost in the polls and, for the reasons outlined above, this ought to be a negative for risk appetite.

3) If there is no clear winner, this might also be minorly risk appetite positive, given an easing of some nerves about a Trump comeback.

Though we can judge the immediate reaction on numerous news outlets who ask voters who they thought won, we only truly know who won by looking at how polls change over the following days. So the initial market reaction might be proved wrong (i.e. imagine the fear is that Trump won and we see risk off, but then Biden extends his lead in the polls in the coming days – any post-debate sell off in risk assets might ease). 


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