Biden Drops Out – Initial Market Playbook

It’s finally Joe-ver, as we say Bye-den to the 46^th President, and hello (presumably) to Kamala Harris, who is now likely to be the Democrat nominee for November’s election, following and endorsement from President Biden after dropping out of the race.

Setting the puns to one side, the news is, largely, as had been expected – after much pressure, and the disastrous debate performance at the end of June, Joe Biden has declined the Democratic nomination, and dropped out of the presidential race. While it remains to be seen how the nominee will now be decided, Biden’s endorsement, as well as that of a host of other lawmakers in Congress, leaves VP Harris in pole position to sit at the top of the ticket come polling day.

Of course, this raises many questions as to the political, macroeconomic, and market, impacts of what is, in modern times at least, an unprecedented action from a sitting President. As an initial playbook, in the day or so following Biden’s announcement, and as the dust settles, the below seems a logical framework:

• Higher cross-asset volatility on the increased uncertainty that has been injected into the election, with the race for the White House likely now considerably more open than it was just a day or so ago, meaning politics as a narrative will come to the fore as a market driver, and risk will likely remain hard to price
• A softer USD as some of the ‘Trump Trade’ that had been running across markets unwinds a touch, with the prospect of a Democratic victory – the likelihood of which has now marginally increased – likely posing headwinds for the greenback
• Stocks should slip, with participants needing little reason to further de-risk after a shaky end to last week, while some of the ‘Trump Trade’ unwind may also be seen on Wall Street; dips, though, should continue to be seen as medium-term buying opportunities, with the ‘Fed Put’ remaining in place, and both economic and earnings growth remaining resilient
• In the fixed income space, the outlook is substantially more nuanced, with fiscal largesse, increased government spending, and a lack of concern over the ballooning deficit one of few policies that unites both sides of the US political aisle; hence, the long-end should continue to find selling pressure, as the curve continues to steepen, with a Fed cut in September remaining the base case

Of course, this all references the knee-jerk market reaction to the latest headlines. In the longer-run, focus will naturally fall on the chances of each candidate of winning the election, which will likely be one of, if not the most, significant market drivers into the autumn.

On the whole, though, if the last week has taught participants anything, it is that anything really can happen in the world of politics. There is still a long way to go until polling day in November and, with the race now much more open than it was before, expecting the unexpected is likely to be a prudent strategy, probably leading to structurally higher vol over that period too.