Knife’s edge: How the US election result will change the world

This week’s US election has enormous implications for global financial markets. With the polls suggesting the outcome is on a knife’s edge, the next few days and weeks will be anxiety-inducing for investors.

Exacerbating the tension is that the policies espoused by the two presidential candidates are so radically different.

Donald Trump proposes not just extending his 2017 tax cuts beyond their expiry next year, but a round of additional cuts for companies and the wealthy. He plans massive increases in tariffs on all imports, particularly from China, and the rounding up, detention and deportation of more than 11 million immigrants.

Elon Musk, anointed by Trump to slash government spending, has pledged to cut $US2 trillion ($3 trillion), or about one-third of government outlays, which would gut America’s social welfare and healthcare systems and radically diminish the role of government. It would also be massively disruptive for the economy and markets.

Under Trump, even without Musk on a cost-cutting rampage, US government debt and deficits would soar by around $US7.5 trillion – it could be a lot more – and rekindle inflation that has been steadily retreating towards the Federal Reserve Board’s 2 per cent target.

Kamala Harris would allow the 2017 tax cuts to expire, while raising taxes for companies and the wealthy. Under her redistributive policies, social welfare and healthcare spending would rise significantly.

She would also add substantially to US deficits and debt, albeit about half as much as Trump. Given her tax increases and their impact on the US deficits, her policies would be less inflationary, and likely to have a much lesser impact on US interest rates than Trump’s.

In foreign policy, Trump would end the war in Ukraine, probably by withdrawing US support and thereby gifting Ukraine, or large parts of it, to Russia and his friend Vladimir Putin. He says he will solve the war in the Middle East, but hasn’t said how. He might withdraw from NATO and other multilateral organisations, pursuing an isolationist and protectionist vision for America.

Harris would continue to support Ukraine and continue the so-far unsuccessful US efforts to mediate a ceasefire in the Middle East while maintaining support for Israel. She would seek to preserve America’s role in the world and its traditional alliances.

There are a host of other differences in the detail of very different sets of competing policies, but the basic conclusion is that America and its relationships with the rest of the world could be very different.

China will be hit hard if Trump wins and carries through with his economic threats, which could in turn harm Australia.Credit: Bloomberg

That makes it challenging for investors. Adding to the degree of difficulty in assessing the implications of the election outcomes, is that the effectiveness of a presidency depends on the make-up of Congress.

A “sweep” – the presidency and control of both the House and Senate – would enable Trump or Harris to implement their platforms, largely without compromise.

A Republican sweep and the likelihood that Trump could implement most of his plans would be bad for bonds because of the implications for US inflation and the massive increase in the supply of US Treasuries but probably good for the sharemarket, because of his tax cuts and deregulation.

It would also likely be positive for cryptocurrency assets, now that the once-sceptical Trump is such a true believer that he and his family recently launched their own crypto business.

A Democrat sweep might be regarded as threatening to the sharemarket because of Harris’ tax policies, but would otherwise broadly represent a continuation of the Biden administration’s approach to the US economy and to international relationships.

A divided Congress, with the Democrats and Republicans each controlling one of the chambers, is a more likely outcome and would limit their ability to implement their economic agendas, although it probably wouldn’t prevent Trump from erecting his tariff wall.

The sharemarket has historically fared best when control of Congress is divided and there is a check on the administration.

Perhaps counter-intuitively, the market has done better under Democrat presidents – it has performed far more strongly under Biden than during Trump’s term – and even better when those presidencies have co-existed with a divided Congress.

Two candidates with vastly different policies has made it difficult for traders.Credit: AP

The range of possible outcomes means there could be multiple different contexts post-election for markets, with the likelihood that the results could be challenged and there could be weeks, if not months, before that outcome is finally settled providing a difficult environment for investors.

Until the past few days, there was confidence in the markets that Trump would regain the presidency. The “Trump trades” were clearly evident, with the sharemarket, bond market, crypto market, and the most obvious barometer Trump Media’s share price all signalling a Trump victory.

Those trades have subsided with the race, according to polls, seemingly now neck and neck.

The US sharemarket has edged down. Bond yields, which had soared over the past month in expectation of a Trump-induced breakout of inflation, have stabilised. Bitcoin’s price, which spiked last month, has fallen 5 per cent in the first few days of this month.

Trump Media’s share price provides the clearest sign that Trump supporters are getting nervous. Having soared 220 per cent last month, it has slumped more than 40 per cent so far this month.

This election has very real implications for the rest of the world, particularly for America’s traditional allies, with the threat of a trade war and a US retreat from the global post-war order that it played such a central role in creating.

The US economy is performing strongly. It is growing and increasing its productivity even as the inflation rate and interest rates are falling. The Fed, which meets this week, is expected to announce a 25 basis point cut, with the markets pencilling in another similar cut in December.

The Biden administration’s Inflation Reduction Act, the CHIPS and Science Act and infrastructure spending have sparked an investment boom, particularly in manufacturing. The CHIPs Act, designed to increase domestic semiconductor production, has prompted more than $US400 billion in new investment promised by chip manufacturers.

This election has very real implications for the rest of the world and particularly for America’s traditional allies, facing a trade war and an American retreat from the global post-war order that it played such a central role in creating.

Trump, who describes the subsidies and loans for semiconductor manufacturing as “so bad”, and House Speaker Mike Johnson have said they would seek to repeal the CHIPS Act and the “green” components of the Inflation Reduction Act.

Johnson has since backed away from his comments and said he would seek to excise regulatory and environmental requirements from the legislation. Much of the investment sparked by the Inflation Reduction and CHIPS acts has been in Republican-leaning states.

For the rest of the world, however, it is Trump’s trade policies and the likelihood that they, with his immigration and tax plans, would reignite US inflation, blow out its government debt and shrink the US economy while generating geopolitical volatility that are most threatening and would have the most impact on their economies, currencies and their financial markets.

China, Australia (because of our dependence on China’s economy), the European Union and emerging market economies would all be hit if Trump is back in the White House and can do what he says he will do.

This election is therefore of real consequence, not just for Americans, their economy and their financial markets but for the rest of the world because the outcomes and their implications could be so radically different – either relatively benign or very threatening – depending on the occupant of the White House and the make-up of Congress.

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