As US election nears, hedge funds gauge far-reaching market impact of Trump-Biden battle

With less than three weeks left until the US presidential election, London-based hedge funds are now closely scrutinising how certain assets and markets will be shaped by the potential outcome of the 3 November poll.

Savvas Savouri, chief economist and partner at long-running UK hedge fund Toscafund Asset Management, said the US government faces a dramatic change in the event of a Joe Biden win, pointing to a “radical” faction of the Democrats – which includes Elizabeth Warren and Bernie Sanders – likely to form part of his cabinet.

“This is a flank committed to wealth redistribution and corporate regulation,” Savouri said in a note this week.

“When this drastic change in US Government is revealed it cannot fail to shock the complacency that has long been in place, and in doing so is certain to undermine confidence in the US debt market and hitherto ultra-powerful tech stocks.”

His research pointed to increases in taxation, regulation and spending in a Biden-victory scenario, with gold and commodities trending upwards along with domestic staples and real goods exporters. On the flipside, the dollar, treasury prices, US tech, US REITs and domestic cyclicals will each head lower in the event of a Democrat win, Savouri noted.

In a wide-ranging commentary, he highlighted that next month’s US poll is one of three “punishingly long fought-out bouts” set to come to a conclusion in Q4, along with Brexit and the expectation of a strengthening yuan in China.

“The looming results of these will markedly shift the tectonic plates upon which the world’s asset prices are ultimately determined, shocking markets not so much out of their complacency, as out of their uncertainty,” Savouri added.

Meanwhile, BlueBay Asset Management, the London-based manager which trades a range of credit, fixed income and emerging market hedge fund strategies, gauged the impact of a range of election scenarios in a recent deep-dive commentary.

David Riley, partner and chief investment strategist, said a ‘blue clean sweep’ – in which Biden wins the presidency and the Democrats gain control of both the House of Representatives and Senate – could see an initial negative reaction in US equities and corporate credit markets due to concerns over higher taxes and regulation, potentially followed by a quick reversal if the new administration inked a new fiscal stimulus package.

A weaker dollar would be “very positive” for emerging market assets despite higher Treasury yields, he added.

On the flipside, a Trump win coupled with a ‘status quo’ Congress could boost the S&P500 and credit markets and nix fears of increased taxes and regulation. The US dollar would also strengthen on renewed concerns that President Trump could reignite the US-China war and threaten tariffs on other trading partners.

Elsewhere, a Biden-victory-with-a-split-Congress scenario “implies little chance of a fiscal stimulus with GOP opposition in the Senate to increased federal spending,” Riley observed.

“Consequently, there would be greater onus on the Federal Reserve to sustain recovery with further monetary easing that along with weaker growth outlook, implies bull flattening of the Treasury curve, is negative for US risk assets and renewed weakness in the US dollar.”

Finally, a ‘red clean sweep’, with Trump retaining the White House and the Republicans taking control of congress, while unlikely, should not be discounted, Riley said.

“The deregulation push would resume which would be viewed by investors as positive for oil and the financial sectors,” he wrote of a clean-sweep Republican triumph.

He added that Trump’s ‘America First’ foreign and trade policies, coupled with moderate fiscal stimulus, possible tax cuts and deregulation, would be seen a positive for US risk assets and the dollar but a negative for emerging markets.