Global investors on edge as US election results loom

As the US election enters its final phase, global investors are bracing for a potential shakeup in financial markets. With the outcome still uncertain, attention is focused on the results expected later today, as the tight race between Republican candidate Donald Trump and Democratic contender Kamala Harris has already triggered market volatility in recent weeks, as detailed in a report by Reuters.

The election's impact could be far-reaching, influencing US tax, trade policies, and broader economic prospects, factors that affect not only the US but the global financial landscape.

One of the most contentious elections in modern US history

This election is shaping up to be one of the most unusual and contentious in modern US history, marked by a razor-thin margin between the two candidates. The results could have wide-ranging consequences for US debt, the strength of the dollar, and industries across corporate America, the Reuters report elaborated further.

With control of Congress also up for grabs, the final outcome may be delayed, further fuelling uncertainty. Investors are particularly concerned about the possibility of contested results, reminiscent of the 2000 Bush-Gore race that saw the outcome of the election undecided for over a month.

Mike Mullaney, director of global markets research at Boston Partners, emphasised the significance of the election, describing it as “the most significant I have seen in my career.” The uncertainty surrounding the results could lead to volatility in global financial markets, especially in the hours following the first vote tallies.

Investors will be closely monitoring key battleground states for early indications, but meaningful results from some of these areas might not emerge until later in the night, heightening the sense of unpredictability.

Despite the election uncertainty, US stocks have performed strongly in 2024, with the S&P 500 hitting record highs thanks to strong corporate earnings and a robust economy, aided by Federal Reserve rate cuts. However, the performance of assets tied to Trump’s standing in the polls has been mixed.

On Election Day, the S&P 500 closed up 1.2 per cent on positive economic data, while certain "Trump trades" i.e., assets influenced by Trump's policy proposals, showed volatility. For instance, stocks related to Trump Media surged initially but closed lower, while bitcoin saw a 4 per cent increase, as betting markets leaned in favor of Trump’s re-election.

The so-called “Trump trades” have been driven by expectations that a second Trump term would bring looser regulations, tax cuts, and tariff hikes, particularly targeting countries like Mexico, which has led to sharp declines in the Mexican peso. Yields on US Treasuries have risen in anticipation of higher inflation, another potential consequence of Trump's policies.

On the other hand, a Kamala Harris presidency would likely result in higher taxes, stricter regulations, and a push for green energy initiatives. Harris' policies could also lead to greater support for clean energy, a shift that could impact energy and related sectors. The battle for control of Congress will also be crucial, as both candidates will likely need to secure their party’s dominance in the legislature to implement significant policy changes.

While historical trends show that stocks tend to rally after elections, especially once the result is clear, investors are concerned that a prolonged or contested vote count could cause turbulence in the markets. As the election results unfold, many are hoping for a swift and decisive outcome to reduce uncertainty and avoid a repeat of the 2000 election recount crisis, which saw the S&P 500 drop by 5 per cent.

As the financial world watches closely, many analysts remain cautious, anticipating that markets will likely experience volatility in the coming days. “An unclear election is a big problem,” said Matt Maley, chief market strategist at Miller Tabak. "There’s a lot going on in the geopolitical arena, and investors are anxious about how it all plays out."