Yesterday’s news of Donald Trump’s speedy recovery and return to the White House was well received by the markets, giving risk assets a boost across the board. The S&P500 closed up 1.8%, WTI gained 6% throughout the session and the dollar slid against its major peers, with the dollar index closing the day down 0.4%. With the Presidential Election now only four weeks away, we consider how this latest development might impact it’s outcome, and ultimately, what it means for the dollar going forward.

The Election

At first glance, Trump looks to have been “one of the lucky ones”. Statistically speaking 90-95% of those aged 74 should recover fairly quickly after a positive test. The fact that Trump’s physicians thought his condition warranted a three night stay in hospital implies that his might not have been the simplest of cases, but it could just be that they wanted to be extra careful given his high profile. Either way, his ability to physically continue on the campaign trail is likely to be severely hampered, and will likely affect his chances of victory. 

Chart 1: Betting Odds
Source: Real Clear Politics / Bloomberg

This is the view that is being portrayed by the betting markets, as shown on the chart above. According to Real Clear Politics, the probability of a Democrat victory has risen to 62% (up from 55% mid-way through last week).

It’s interesting to draw comparison between the US President and Boris Johnson, who caught the virus back in March. Clearly Johnson’s case was a little more severe – the PM spent seven nights in hospital, including two in intensive care, before heading to Chequers to continue his recovery throughout April. During this period, his approval rating went up (see YouGov chart below), potentially through a vote of sympathy.

Chart 2: Boris Johnson approval rating
Source: You Gov

At this stage, we don’t have enough data to determine whether Trump’s popularity has benefited in the same way, but early indications suggest this may not be the case. That could be the result of his symptoms being less severe or it may be a consequence of his views and handling of the pandemic to date. The latest data from FiveThirtyEight shows Trump’s approval has fallen from ~44% during September to ~41% during the first four days of October.

Impact on the dollar

So far, the dollar has continued to trade in line with the ‘risk on, risk off’ theme. The initial reaction to Trump’s diagnosis on Thursday was marginally skewed towards ‘risk off’ – the dollar was fractionally stronger and risk assets came under pressure. That sentiment has since been reversed as it was announced that Trump would leave hospital and today -we see the dollar marginally softer while equities and commodities are all enjoying stellar gains.

From a short-term perspective, the market is focused on whether or not additional stimulus (primarily fiscal stimulus but potentially also from the Fed) will be forthcoming. Trump managed to Tweet from his sickbed on Saturday that both sides should “unite to provide a fiscal stimulus package”, while Fed Chair Jerome Powell also offered his support. For now, it seems unlikely that a deal on a fiscal package could be reached prior to November 3rd, but if it could, it would almost certainly be positive for risk assets and detrimental to the dollar.  

Looking further forward (and assuming no stimulus before the election), the likelihood of any stimulus package will be dependent upon the election result. A Democratic victory in both houses would make it easier to get a package through, although it might not be quite as ‘business friendly’ as Trump would like. That said, it should be beneficial enough to boost risk appetite. If the Houses are split, a package will likely be further delayed as further negotiations will be required. We expect this to be a negative for risk assets and a marginal positive for the dollar (in the near term at least).  

What’s more difficult to gauge is what happens to the dollar if the Republicans take both houses. Clearly a large stimulus package focused on helping big business would be forthcoming, and would also boost equity markets. If the ‘risk on, risk off’ trade holds, this should be negative for the dollar. However, over the past four years, this hasn’t always been the case and the Trump factor has been beneficial for both. 

In the event of a Congressional crisis where either side doesn’t accept the other’s victory, risk assets will certainly come under heavy pressure. Given that it’s a US-centric problem, there is an argument to suggest that the dollar will weaken, but this is far from certain. Likewise, markets could be plagued with uncertainty if a result is not known immediately. Looking at the options market, although volatility remains low, the ‘wings’ are being increasingly bid up as traders look to protect themselves, regardless of which way the dollar goes. From our perspective, this highlights the uncertainty in the market and reinforces the need for carefully considered risk management.

Author: Marc Cogliatti