While news of Donald Trump contracting Covid-19 certainly set social media alight, a Citi Private Bank’s CIO Strategy Bulletin did not report any particularly significant market implications. And though investors did adopt a risk-off position, Bank of Singapore (BOS) Head of Investment Strategy Eli Lee sees no long-term impact on the economy and maintains his long-run constructive outlook on financial markets.
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“At the time of writing, US equity futures are down more than 1% while October futures for the CBOE Volatility Index (VIX) spiked as much as 12% before easing downwards,” writes Lee in a broker’s report for Oct 2. The risk-off positioning saw the US Dollar (USD) weaken against safe-haven assets like the Japanese Yen (JPY) and gold while broadly strengthening against emerging market (EM) currencies.
An interesting exception to this trend is the offshore Renminbi (CNH), which contrary to expectations performed range-bound relative to USD. With China leading the global economic recovery, says Lee, RMB may be taking on “safe-haven” characteristics as investors stock up on Chinese currency to hedge against growing uncertainty in the US. He expects markets to exhibit short-term volatility while it tries to make sense of the significance of Trump’s illness.
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But Citi’s chief investment officer David Bailin and chief investment strategist and chief economist Steven Wieting observe that the reaction of the market has been more muted than expected despite news of an ill-stricken president.
“This was not the market performance one might expect amidst the dual risks of a President in peril and a worsening view of the pandemic. But it may be indicative of the view that “good” may yet come of these events,” the pair surmise, hoping for more fiscal stimulus going forward.
Both Bailin and Wieting says they do not see the US election being delayed by Trump’s announcement, since this would require the consent of the Democrat-controlled House of Representatives. The Supreme Court nomination of Coney Barrett to the bench is also unlikely to be delayed. The news may also see senate Republicans grow more receptive to a compromise on greater stimulus, they add.
The health announcement could, however, have some bearing on who wins the coming presidential elections. According to Lee, Trump’s prospects could improve should he garner a wave of sympathy votes, which UK Prime Minister Boris Johnson received after he also contracted Covid-19. Under this scenario, Biden’s lead could narrow and the risk of a contested election could increase following Trump’s debate promise to contest the polls should he lose.
But markets are pricing in for a Biden win, believing voters believe that Trump has been incompetent in managing the pandemic and irresponsible in taking sufficient precautious to ensure his own safety as leader. The CIO Strategy Bulletin also notes that this would likely mean that arguments for Biden’s more cautious approach to Covid-19 would be strengthened, improving his poll chances and therefore reduce the likelihood of a contested outcome.
A contested outcome, says Lee, should lead to greater volatility in terms of risk assets due to the resulting political instability of a contested poll and vice versa. “This would probably result in weeks of legal disputes and only be put to rest when the Supreme Court rules on the final result. Such a brouhaha would not only create uncertainty in the financial markets, but also poison the political climate and divert attention away from today’s daunting economic challenges,” adds VP Bank Chief Economist Dr Thomas Gitzel.
Lee, however, raises the prospect of both candidates contracting Covid-19, despite Biden having undergone two negative Covid-19 tests on 5 October. “Should Biden also test positive for Covid-19, we would expect an extended period of uncertainty and market volatility," warns the BOS Head of Investment Strategy, noting that both Trump and Biden are at especially great risk of an adverse reaction to Covid-19 because they are both above seventy years of age.
But ultimately, says Gitzel, it may be the senate rather than the White House that will be the crucial race to watch in 2020. “Oddly, anything that complicates the political work of the next president would probably represent the best scenario for the financial markets, only because of the decreased potential for political experiments; in other words, continuity would be ensured,” he argues. Presidents have to compromise to pass laws if the senate is controlled by another party.
Still, Lee believes that the long-run market outlook remains positive, as the broad fundamentals of the global economy hint at gradual recovery. Policymakers have also been supportive by providing ample fiscal and monetary stimulus to support the recovery efforts.
With election-related uncertainties to ease after 1Q2021 and with more fiscal support to come, Lee does not advocate a selling strategy. He instead recommends investors to seek risk opportunistically should prices be sufficiently attractive to seize whatever opportunities become available in this uncertain market. "We believe it is time for caution but not panic,” he concludes.
