Goldman Sachs economist Zach Pandl made a prediction last week about the impact of the US election on the US dollar and US stocks:
US dollar . Pandl believes that if Biden is elected president and the Democratic Party wins an overwhelming victory, the US dollar may accelerate its decline, mainly because Biden proposed to raise US corporate tax rates, advocate large-scale fiscal stimulus and multilateral foreign policy, which will reduce the premium of non-US currencies, thereby putting pressure on the US dollar.
4 U.S. stocks , Pandel pointed out that if the Democratic Party wins, the trend of major U.S. stock indexes will become complicated. The stock market will be most directly hit by the increase in corporate taxes caused by the Democratic victory. But larger fiscal stimulus and more predictable trade policy prospects will at least moderately support U.S. stocks.
In less than a week, Goldman Sachs released another report, deducing and analyzing the possible impact of various election results on the performance of US Treasury bonds in , and studying how the market will be affected if there is a situation such as the election postponement.
Goldman Sachs interest rate strategist Praveen Korapaty wrote:
"The upcoming U.S. election may become a catalyst for interest rate repricing."
Scenario 1 The election situation is highly uncertain
Goldman Sachs believes that voters who choose to vote by mail this year may increase significantly.
Since in some states (especially swing states), the verification and counting of mail-in ballots will not be carried out until Election Day. Considering the experience of the primary election, it is very likely that the result will not be available on Election Night. While the market appears to have priced this possibility, there are other potential sources of uncertainty.
It is particularly noteworthy that there are obvious differences between Democrats and Republicans in the choice of voting methods. The vast majority of Democrats expressed their willingness to vote by mail, while most Republicans tend to vote in person. Trump previously pointed out that the use of mail-in ballots will undermine the fairness of the presidential election voting mechanism.
In such a fierce general election, differences in voting methods may lead to claims or lawsuits from the loser against the winning party, increasing uncertainty and causing substantial market fluctuations over a longer period of time.
Goldman Sachs expects that in this case, if the stock market falls sharply, the 10-year US bond yield will return to its previous low, that is, a drop of 50 basis points.
Scenario 2 The election situation is clear and
If the Democratic Party wins an overwhelming victory, then Goldman Sachs expects U.S. Treasury yields will rise.
According to Biden's agenda, government spending will increase significantly, and he will also make up for the income gap by raising taxes.
However, considering that the Democrats may have a weak majority in Senate in this case, the full agenda is unlikely to be adopted. Goldman Sachs economists estimate that under the unified control of the Democratic Party, the government spending gap between 2021 and 22 will be 2-2.5 percentage points lower than the current baseline.
Expansion of spending boosts the economy, optimistic outlook for vaccine development, and loose monetary stance will further reduce the unemployment rate and boost economic and inflation expectations.
Goldman Sachs' fundamentals-based maturity premium model shows that changes in net profit margins will lead to upward pressure on bond risk premiums, and 10-year U.S. Treasury yields may rise by 30 basis points in the next few months.
It is certain that This situation may lead the market to advance the Fed's expectation of interest rate hikes. Goldman Sachs predicts that this situation may lead to the Fed hike in 2023, rather than 2025.
If the risk is priced, is estimated to cause a 30-50 basis points increase in yields , but this is unlikely to occur immediately after the election, especially given that risk sentiment may be poor. yields may rise about 10 basis points shortly after the election (similar to the month after Trump was elected in 2016), and a month later, yields are expected to rise sharply by 30 basis points.
Scenario 3 Government split
If Biden is elected and the Republicans control the Senate, there are no major new fiscal measures during Biden's presidency, and market risk sentiment may be suppressed, but trade and foreign policy will be more clear.
There is another situation where if Trump is re-elected and Democrats control at least one House of Congress, a compromised economic plan may be introduced, but there is persistent uncertainty in trade and foreign policy.
Overall, in both cases, Goldman Sachs economists expect a strong rebound in the economy after the widespread vaccine rollout, even without additional stimulus.
In this case, short-term U.S. Treasury yields will not change substantially, but longer-term bond yields may rise to a certain extent (the yield curve will also be slightly steep), because there is a higher possibility of a small-scale fiscal stimulus plan after the election.
Scenario 4 The Republican Party won a great victory
Current polls show that this situation is unlikely to occur. However, if this happens, there will be additional fiscal measures and streamlining taxes, and the yield will rise again, but it will not reach the level of a complete victory for the Democratic Party.
Korapaty finally added that the above deductions are based on the premise that there is no major change in fundamentals. If the number of new coronary pneumonia suddenly increases or the vaccine is delayed, the increase in the yield rate mentioned above will narrow.
Source: Jinshi Data
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