How will the global financial market react if Harris wins?

Unsurprisingly, most of the focus on the upcoming presidential election in the US has been on the implications of a victory for former president Donald Trump. This may have seemed wise before Biden handed the reins to his deputy Kamala Harris. But now it seems to make sense to ask how the markets react if Harris emerges as victor on November 5th.

There are a number of aspects here. The first issue is whether Harris can win, or whether the rise in opinion poll support is a honeymoon period that won’t last. The second is how gracefully Trump will go if he loses, bearing in mind the insurrection that followed his defeat in January 2021. The third is whether the market is priced for any particular outcome, and the last relates to the policy platform that Harris runs on.

Concerning the first of these, national polls are showing Harris closing the gap, if not inching ahead of Trump and some of the key swing state polls are doing the same. Harris seems to stand a much better chance than Biden did before his withdrawal but that’s not too surprising. Given this momentum, it seems that victory for Harris is possible. But is this supportive for asset prices, including the dollar?

The key here, at least initially, is likely to be the margin of any victory. For a comprehensive rout of the Republicans could deny Trump the ability to try to overturn the outcome of the election as he did in 2020. But a comprehensive victory seems unlikely and that opens up the prospect of the sort of post-election weakness that we saw in the dollar last time. For back then the dollar’s DXY index fell by close to 4% between the election on November 4^th 2020 and the end of that year.

Of course, we have to add the usual caveat that history is a good guide to the past, for, back in late 2020, the US and other countries were still heavily involved in tackling Covid and, in particular pushing out Covid jabs which started on December 2020.

Nonetheless, Steve Barrow, Head of Standard Bank G10 Strategy feels that if Harris wins a very close election on November 5^th the initial market reaction, at least in the dollar, will be one of weakness. The extent of any such fall will, in turn, be influenced by what sort of positions traders and investors have in place going into the election. If the mindset is defensive, with few prepared to bet on a post-election rally in the US dollar, any setback for the greenback is limit  ed. Of course, this works the other way if the dollar is bid up on aggressive buying ahead of the election.

As far as we can tell, market positioning may well prove quite light going into the election. For a start, besides dollar/yen, the FX market has been incredibly quiet for some time, particularly euro/dollar. This, in itself would seem to be indicative of a market that is unsure and, unless opinion polls move very decisively before polling day – which we doubt – it seems that positioning in the US dollar will be broadly neutral come November 5^th.

Beyond the likely movements in the US dollar in the days and weeks following the election there is also the question of the longer-term outlook based on the policies of the new administration. Most appear to view a Trump presidency as potentially bullish for the dollar based on things like new tariffs, possible tax cuts and based on the rally we saw in 2016 when he won his first term.

But what about if Harris wins? Will the dollar go down because the market is at least moderately priced for a bullish Trump presidency? Steve Barrow is not sure that the market is positioned in this way. If that’s the case, the policies that Harris puts forward may be key. He doesn’t know a lot about these yet but they likely won’t include the same tariffs and tax cuts that Trump is proposing.

In fact, we may find that with Trump still polling better than Harris (and Biden before) on economic competence, the Democrat strategy is not to fight the election so much on the economy, but on the other factors that may garner support, such as abortion laws. “If that’s the case, and if Harris does win by only a narrow margin we may find that the dollar initially declines, because of fears over another insurrection, and then struggles to make up for lost ground as the presidency takes shape,” said Steve Barrow.