The US Presidential race, the markets, Big Tech and tax - BNP Paribas CIB
 
Friday 16 October 2020

Americans will vote following a Presidential election campaign unlike any other. The results have major market ramifications irrespective of who wins.


With less than one month to go until voting day, Dr Daniel Ahn, Chief US Economist and Head of Markets 360 North America at BNP Paribas, hosted a dynamic virtual panel, "US Election Countdown: Economic, Policy and Market Implications." Joining him were Steve Nawrocki, Head of Equity Derivatives, Americas, at BNP Paribas and Jim VandeHei, Co-Founder and CEO at AXIOS and Co-Founder and former CEO at POLITICO. The panel looked at how the upcoming election could reshape markets.



Expect the unexpected

Although the latest national polls indicate that former Vice President Joe Biden is significantly ahead of President Donald Trump, the difference between the two candidates is much tighter in some of the key battleground states. One expert said markets have under-priced the risk of serious instability occurring following the election. The expert suggested that unless Biden wins by a very large margin of at least five points in the major swing states, President Trump could potentially dispute the result as being fraudulent by pinning blame on the rise in absentee voting and mail voting.

Nawrocki said that a Biden victory would be seen by markets as being a positive development, resulting in projected gains of around 5 percent. Conversely, Nawrocki conceded that a chaotic outcome – namely a contested Presidential election result – could lead to US equity markets dropping by 15 percent, although he added that options markets currently implied a 10 percent probability of this scenario unfolding. Not everyone is convinced. "I think that figure for a chaotic outcome is certainly more than 10 percent, but less than 50 percent," stated one speaker.

Big Tech in the spotlight

In the event of a Biden victory, experts predict some of the big US technology firms could face added scrutiny and may even be broken up. A straw poll during the virtual event found 53 percent of listeners reckoned a Biden administration would attempt to split up Facebook. The expert said Democrats believe these technology giants have become too powerful, and that more regulation of the sector is needed. Meanwhile, Ahn said it was positive that policymakers, academics and economists were now thinking seriously about how to update rules around anti-competitive practices and anti-trust for the 21st century and anticipated a closer collaboration with policymakers on the revamp under a Biden administration.


Tax hikes and the impact on markets

Taxation is likely to be a key area of focus should Biden assume the presidency. During the event, 68 percent of audience members told a straw poll that that they expected a Biden administration would reverse the 2017 Tax Cuts and Jobs Act by the first quarter of 2021. "Investors are excited by the idea of further stimulus measures, but they are anticipating tax hikes in the event of a Democrat sweep," said Ahn. BNP Paribas economic research suggests that Biden's tax plan would defray roughly half of the anticipated fiscal spending under a Democratic sweep scenario. Speakers agreed a Democrat victory would likely lead to tax rises and capital gains reform, but doubted Biden would adopt radical measures especially if it risked upsetting markets.


On markets, Nawrocki said a Biden win would have a mixed impact on US equities depending on the sector with telecommunications, infrastructure and industries linked to the Green New Deal likely to fare very well during his tenure. "I would be flat on technology; a little short on energy; and short financials and healthcare," he continued. However, the repercussions of a Biden presidency on financials may not be as bad as people think especially if the administration adopts a centrist position on regulation, he added.

The future of politics

US politics remains highly polarised, and one speaker was not confident this would change anytime soon. He said the Republicans had become more "Trumpian," disdainful of mass media, supportive of protectionism and hostile to overseas intervention. At the same time, he pointed out that the Democrats were moving in a more liberal direction on tax, immigration, spending, law enforcement and the environment. "It is hard to know what either party will stand for in 10 years' time," said the speaker.

The US election will be the most closely watched in years. Although experts are convinced that Biden is on course to win a comprehensive victory, there is apprehension about whether the current administration will relinquish power, a situation which has no precedent in modern US history. According to the speakers, should this chaos scenario actually materialise, the market reaction could be very volatile.



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