Show Transcript
The U.S. election is just over 2 months away, and it’s shaping up to be one of the most contentious elections in modern history. Kim Parlee speaks with Priya Misra, Head of Global Rate Strategy at TD Securities about the potential outcomes of the election and the implications on financial markets.
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- We are only two months away from one of the most contentious elections in US history and all the impacts that might have on the markets. Here to discuss the potential outcomes and market implications, Priya Misra. She's head of global rate strategy at TD Securities. Priya, it's great to have you with us again. I just want to start off, I mean, going into any election, the economy is always front and center, but this time there's a twist, obviously, with COVID and the economy. What would you say about how these issues are affecting President Trump and Joe Biden's chances?
- I have to say, it's all about COVID right now. I mean, the two issues, COVID and the economy, are extremely linked, clearly. I think, you know, the fact that we've seen this dramatic change in the polls from March up until now tells you that the fact that we've had COVID hit us, the fact that you've got 20 million unemployed Americans out there, that's having an impact on President Trump's reelection chances. We had sort of another blip in terms of an increase in the number of infections that we saw in June and July, and that saw President Trump's reelection chances decline somewhat.
So I'm going to argue it's largely about how COVID-- you know, what's the outlook for COVID. And we've got school reopenings coming up in the fall, plus the flu season, right into the election. So if there's one statistic you have to watch for the election, I'd have to say it's the rate of infections, it's mortality, it's about how, you know, hospitalizations go ahead.
- Now, I know you were on a panel recently, and you made the argument that you don't believe that rates or markets have really priced in the election and the outcomes. Take me through your thinking on that.
- I think it's just too early right now. You know, if you just look at the polls right now, you might actually say that Joe Biden is winning, and so the election is over. But there's still, you know, 90 days to the election, so there's still time. We don't know how the COVID outlook will emerge, we don't know how school reopenings happen, so there's still a lot of unknowns into the election.
So for the market to price in binary outcomes-- and I would argue political risk is always hard for the market to price in because, you know, they are binary outcomes, hard to hedge, hard to price in. But we also have a lot of time, and I will say that, in 2016, these polls were entirely wrong. And even conventional wisdom about what would happen if President Trump got elected, I think even that turned out to be very different.
So I think conviction level on polls, on what happens under either scenario, when that's so low, I think the market has a much harder time pricing it in. As we get closer to the election, I think the polls become a little bit more predictive, and if it looks like a landslide, I think then you could get some market reaction into and out of the election.
- Hm. Yeah, I mean, we think about last election, and the polls were just wrong, again, going into this. So I know people have a whole lot less reliance on them. Despite all this, though, the Fed is very firm, it seems, on keeping rates low and doing what they need to do for an extended period of time.
- I think so, yes. I think that the Fed is extremely apartisan, so this is something that the Fed is looking at the economy. And I think it's interesting that, despite the slightly better data that we've seen in the last couple of months, they've not changed their rhetoric at all. They're talking about the virus resurgence risk. They're extremely concerned about that scenario.
The Fed is also talking about structural damage that may be being done right now to the economy. So therefore, they've been extremely dovish, and they've been suggesting that they're going to release the framework review in the near term. And we think that's going to allow them to ease both from a forward guidance standpoint, to state that they won't hike rates until inflation is above target, which is a very high hurdle, and also that they will continue to do QE, so continue to buy treasuries, and potentially further out the curve. So I think the Fed is very much on this dovish path, and I think rates stay low for an extremely long period of time.
- That might be bullish for the equity markets, I think, with rates staying so low, but maybe just give me your thoughts on, you know, I know you don't cover equities specifically, but when you look at equities, when you look at just positioning your risk over the next three months, I mean, what would you do?
- So I am a little concerned that the equity market may be a little too comfortable about the election now. It is early, but if it's clear that we're going to get what they call the blue sweep, so the Democrats taking over the House-- they already have the House, and if they take over the Senate and the presidency, you actually-- anytime there is sort of non-split government, in the sense when we've got one party owning all three, there can be pretty big changes that can happen.
You know, is there a reversal of the Trump tax cuts in that scenario? I think if that scenario starts to increase in the market's mind probability-wise, I think you could get a bit of a reaction in equities, risk-off reaction. Plus, I would argue uncertainty is not good for any risk asset. So in that scenario, as well, given what a great bull run equities have had, I wouldn't be surprised with some nervousness, risk off into the election, as I think conviction levels will go down as we're heading into that date.
- What hints will you be listening to for those types of things to come to fruition, the tax cuts? I mean, we know that President Trump came in with some very liberal policies about getting rid of a lot of, you know, red tape, bureaucracy, taxation. What are you going to be listening for to hear the things could be reversing?
- I think, number one, we should be watching polls and watching the Senate. I think there's so much focus on the White House, but if the Senate stays Republican, a Biden president really can't get a lot done. So just a sense of how much are the Democrats likely to take over the Senate. The other thing would be to get a sense in perhaps the debates or as the campaign actually begins-- we've never dealt with a virtual campaign, so we're going to see how much policy proposals actually come up.
There wasn't a whole lot in the convention. But I think in the debates, to get a sense from Joe Biden, is he the Joe Biden we knew eight years or four years ago, or is he more about the liberal body of the Democratic Party? And if he's more towards the liberal wing, I think the market could get nervous, because then we are talking about pretty aggressive tax increases for, you know, upper income. And that could be negative for a bunch of stocks.
- Let me ask you a final question, Priya. I mean, the US dollar has weakened this year, not surprisingly, given everything that's going on. For those in Canada, the CAD has weakened, too, so you know, we're seeing them both go together. But we're seeing it in commodities. What do you see for the US dollar?
- The dollar is always more tricky because you've got to have a view on the rest of the world and the US, as well. You know, our view is that, if you get a Biden presidency, that it's much more negative for the US dollar in the near-term. And the reason that is, is the rest of the world, you know, we expect the Biden presidency, even without any big change in the economy, to sort of be more global growth-oriented, not to have the kind of trade uncertainty that we had under President Trump. So under Biden, we could see a weaker dollar.
If President Trump does get reelected, there could be a knee-jerk positive on the dollar. There could be a bit of nervousness around US-China trade tensions. But longer-term, I think it actually argues for more diversification away from the dollar. So a long-term view on a weaker dollar persists, but I think there could be some volatility right into the election.
- Priya, always a pleasure. Thanks so much.
- Thank you.
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- I have to say, it's all about COVID right now. I mean, the two issues, COVID and the economy, are extremely linked, clearly. I think, you know, the fact that we've seen this dramatic change in the polls from March up until now tells you that the fact that we've had COVID hit us, the fact that you've got 20 million unemployed Americans out there, that's having an impact on President Trump's reelection chances. We had sort of another blip in terms of an increase in the number of infections that we saw in June and July, and that saw President Trump's reelection chances decline somewhat.
So I'm going to argue it's largely about how COVID-- you know, what's the outlook for COVID. And we've got school reopenings coming up in the fall, plus the flu season, right into the election. So if there's one statistic you have to watch for the election, I'd have to say it's the rate of infections, it's mortality, it's about how, you know, hospitalizations go ahead.
- Now, I know you were on a panel recently, and you made the argument that you don't believe that rates or markets have really priced in the election and the outcomes. Take me through your thinking on that.
- I think it's just too early right now. You know, if you just look at the polls right now, you might actually say that Joe Biden is winning, and so the election is over. But there's still, you know, 90 days to the election, so there's still time. We don't know how the COVID outlook will emerge, we don't know how school reopenings happen, so there's still a lot of unknowns into the election.
So for the market to price in binary outcomes-- and I would argue political risk is always hard for the market to price in because, you know, they are binary outcomes, hard to hedge, hard to price in. But we also have a lot of time, and I will say that, in 2016, these polls were entirely wrong. And even conventional wisdom about what would happen if President Trump got elected, I think even that turned out to be very different.
So I think conviction level on polls, on what happens under either scenario, when that's so low, I think the market has a much harder time pricing it in. As we get closer to the election, I think the polls become a little bit more predictive, and if it looks like a landslide, I think then you could get some market reaction into and out of the election.
- Hm. Yeah, I mean, we think about last election, and the polls were just wrong, again, going into this. So I know people have a whole lot less reliance on them. Despite all this, though, the Fed is very firm, it seems, on keeping rates low and doing what they need to do for an extended period of time.
- I think so, yes. I think that the Fed is extremely apartisan, so this is something that the Fed is looking at the economy. And I think it's interesting that, despite the slightly better data that we've seen in the last couple of months, they've not changed their rhetoric at all. They're talking about the virus resurgence risk. They're extremely concerned about that scenario.
The Fed is also talking about structural damage that may be being done right now to the economy. So therefore, they've been extremely dovish, and they've been suggesting that they're going to release the framework review in the near term. And we think that's going to allow them to ease both from a forward guidance standpoint, to state that they won't hike rates until inflation is above target, which is a very high hurdle, and also that they will continue to do QE, so continue to buy treasuries, and potentially further out the curve. So I think the Fed is very much on this dovish path, and I think rates stay low for an extremely long period of time.
- That might be bullish for the equity markets, I think, with rates staying so low, but maybe just give me your thoughts on, you know, I know you don't cover equities specifically, but when you look at equities, when you look at just positioning your risk over the next three months, I mean, what would you do?
- So I am a little concerned that the equity market may be a little too comfortable about the election now. It is early, but if it's clear that we're going to get what they call the blue sweep, so the Democrats taking over the House-- they already have the House, and if they take over the Senate and the presidency, you actually-- anytime there is sort of non-split government, in the sense when we've got one party owning all three, there can be pretty big changes that can happen.
You know, is there a reversal of the Trump tax cuts in that scenario? I think if that scenario starts to increase in the market's mind probability-wise, I think you could get a bit of a reaction in equities, risk-off reaction. Plus, I would argue uncertainty is not good for any risk asset. So in that scenario, as well, given what a great bull run equities have had, I wouldn't be surprised with some nervousness, risk off into the election, as I think conviction levels will go down as we're heading into that date.
- What hints will you be listening to for those types of things to come to fruition, the tax cuts? I mean, we know that President Trump came in with some very liberal policies about getting rid of a lot of, you know, red tape, bureaucracy, taxation. What are you going to be listening for to hear the things could be reversing?
- I think, number one, we should be watching polls and watching the Senate. I think there's so much focus on the White House, but if the Senate stays Republican, a Biden president really can't get a lot done. So just a sense of how much are the Democrats likely to take over the Senate. The other thing would be to get a sense in perhaps the debates or as the campaign actually begins-- we've never dealt with a virtual campaign, so we're going to see how much policy proposals actually come up.
There wasn't a whole lot in the convention. But I think in the debates, to get a sense from Joe Biden, is he the Joe Biden we knew eight years or four years ago, or is he more about the liberal body of the Democratic Party? And if he's more towards the liberal wing, I think the market could get nervous, because then we are talking about pretty aggressive tax increases for, you know, upper income. And that could be negative for a bunch of stocks.
- Let me ask you a final question, Priya. I mean, the US dollar has weakened this year, not surprisingly, given everything that's going on. For those in Canada, the CAD has weakened, too, so you know, we're seeing them both go together. But we're seeing it in commodities. What do you see for the US dollar?
- The dollar is always more tricky because you've got to have a view on the rest of the world and the US, as well. You know, our view is that, if you get a Biden presidency, that it's much more negative for the US dollar in the near-term. And the reason that is, is the rest of the world, you know, we expect the Biden presidency, even without any big change in the economy, to sort of be more global growth-oriented, not to have the kind of trade uncertainty that we had under President Trump. So under Biden, we could see a weaker dollar.
If President Trump does get reelected, there could be a knee-jerk positive on the dollar. There could be a bit of nervousness around US-China trade tensions. But longer-term, I think it actually argues for more diversification away from the dollar. So a long-term view on a weaker dollar persists, but I think there could be some volatility right into the election.
- Priya, always a pleasure. Thanks so much.
- Thank you.
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