US voters head to the polls this Wednesday November 6th (Australian time). 

If the betting odds prove correct, Republican candidate Donald Trump looks set to regain the Presidency - albeit polling (as distinct from betting) remains very close, particularly in the seven key swing states.

Trump currently holds the lead (based on polling) in four of the seven swing states, but margins are narrow. In the largest swing state, Pennsylvania (which represents 19 electoral college votes), Trump is ahead by only 0.6%. Conversely, Democratic candidate Harris is in the lead in three of the swing states by less than 1 % in each case. So, the polling margins remain very fine.

The more marked trend toward Trump in the betting markets likely reflects a view that Trump outperformed the polls in both the 2016 win against Hilary Clinton and the 2020 loss to Joe Biden. The betting markets seem to implicitly expect Trump to once again “outperform” the polls, albeit there is still a degree of uncertainty around whether these trends will be replicated, based on what happened during the US mid-terms. 

Asset markets also appear to have swung behind Trump in recent weeks, with the performance of a range of “Trump Trades” seeming to reflect rising odds of a Trump victory. 

At a high level, this appears to include the ongoing uptrend in US equities, the rise in the US dollar and US bond yields, as well as the rise in US banks and the price of Bitcoin.

The extent of these recent performance trends is also important in assessing the likely market reaction to the result. For example, while a Trump victory is widely perceived to be a tactical positive for US equities, we would caution that since August 5th, the S&P has already risen 12% (as at October 31). This is the highest return from August in the run up to an election in history (the median return is 2.6% during this period in US election years). 

Consequently, if Trump indeed does re-take the Presidency, any rally may be relatively muted based on the unusually large pre-election run-up.

Conversely a “surprise” Harris victory may be significantly negative tactically for US equities, while at the same time causing a decent reversal in the US$, US bond yields, and Bitcoin. While this is a tactical consideration, we don’t see the prospect of an upset Harris win leading to sustained weakness in US equities. A Harris win, while an upset, would effectively be an extension of the status quo political framework, with fundamentals likely to reassert their influence relatively quickly.

One area where a divided congress may not hinder policy implementation is in trade and tariff policy. Trump has been campaigning on the premise that he will move to impose a 10% (20% in some speeches) tariff on all trading partners and a 60% tariff on all imports from China. Under these policies, the US tariff rate would increase to nearly 17% from its current level of 3% - the highest tariff rate since the 1930’s. 

Trump’s tariff proposals need to be taken seriously, given that much can be done without the assistance of Congress. This policy can be accomplished by invoking the “Trump Reciprocal Trade Act”. The Trade Act permits the Executive to impose aggressive trade remedies on countries seen as engaging in unfair trade practices, especially related to strategic goods (which now includes almost everything). 

It also permits trade restrictions on national security grounds, an area which can be interpreted extremely broadly. These sections were cited by President Trump in 2018, when he imposed tariffs on steel and aluminium. Trump’s trade policies are likely to be both inflationary and a tax on the US consumer, given higher import prices. Some form of tariff retaliation (particularly from China) would also to be expected if the proposed tariffs proceed. Indeed, Trump’s policy at face value raises the risk of some sort of global or at least US-China trade war, resulting in a significant stagflation overhang for the global economy. Of course, Trump may ultimately moderate his position - particularly the 10% tariff on rest of world imports. However, even if Trump scales back his current proposals, the outcome would still almost certainly be worse than the relatively constrained tariffs levied in 2018. 

As a result, we see Trump’s signature trade/tariff policy as the most worrying aspect of a potential Trump second term. Markets may well be under-pricing the risk of a global trade war and long-term potential stagflationary impact on the global economy. 

In contrast a second Democratic term would largely represent a continuation of the status quo regarding trade and tariffs. Biden’s decision not to unwind Trump’s tariffs is a clear acknowledgment that voters are sceptical of free trade, especially after so many manufacturing jobs were moved offshore in recent decades. One policy difference, however, is that Harris would likely refrain from imposing new tariffs, instead favouring industrial policies to encourage domestic manufacturing and the reshoring of production capacity. 

Trump has repeatedly stated that he would not reappoint Fed Chair Powell, whose second term expires in May 2026 (Trump first appointed him in 2018). However, his ability to handpick a new dovish candidate is limited by the fact that it requires Senate approval (a few moderate GOP Senators might refuse to confirm an unorthodox Fed chair). Additionally, Presidents can only replace Fed chairs during their term “for cause,” and that would be a difficult case to make (and has never even been attempted before). 

All that said, extensive criticism and dovish pressure towards the FOMC could challenge the Fed’s independence and raise long-term inflation expectations.

The response of several assets to the sharp uptick in Trump’s probability of winning the election gives us a clue as to how markets might react if the former president were to prevail in November, and proceed to lecture Powell on the need for significantly lower interest rates.

A Trump administration would likely be negative for green energy. Trump has promised to repeal much of the Inflation Reduction Act (IRA), which includes subsidies and tax credits for battery manufacturing, clean power projects, and EVs. However, this would once again require a Republican sweep to modify the 2022 legislation. Trump has promised to expand fossil fuel production even further, by expediting the approval of new drilling & pipeline projects and loosening regulations. While greater energy independence could help cushion the US economy from oil supply shocks, increased supply would weigh on prices, with US crude oil production already at an all-time high. Harris would oversee continued implementation of the IRA, a push for greater EV adoption, and more solar and offshore wind production. She would continue targeting investments to cut greenhouse gas emissions by 50% by 2030. Interestingly, clean energy outperformed traditional energy during the Trump administration. However, this is a reminder that factors other than the President’s policy agenda often drive performance. One such factor was the pandemic during Trump’s term, which resulted in a steep decline in commodity prices and a sharp decline in interest rates that likely benefited clean energy businesses. During the Biden administration, the Russia-Ukraine war had a more prominent influence on oil and gas prices despite a policy push for clean energy.