Therefore,  this medium-term political uncertainty risk is still likely to remain before the US election settles down in November, and it will also have a significant impact on the global capital markets.

During our webinar in July, we proposed that market risks in the second half of the year will change from "grey rhinos" to "black swans". The over-crowded yen carry-trade was an example of a "grey rhino" risk, as it has existed for a long time but does not attract enough market attention, until it suddenly broke into a "black swan"event, which caused a huge shock in the market. We believe that although the short -term impact of the yen carry-trade unwinding has passed, there may be more "grey rhino" risks to become possible "black swan" incidents in the future.

Before the US election settles down in November, investors will have to be vigilant about various uncertainties. From the tumble of Biden's approval rate to Trump's failed assassination, as well as candidate change within the Democratic party, this US election is unlike anything we have seen before. After Harris replaced Biden, her approval rate continues to rise, and it has already surpassed Trump again. For the financial markets, this means that there are huge uncertainties in the future on both US internal affairs and foreign policies,  and the political polarization and policy divergence of the two parties in the US are going to get wider. Therefore,  this medium-term political uncertainty risk is still likely to remain before the US election settles down in November, and it will also have a significant impact on the global capital markets.

Biden’s dropout from the election means that short-term US stock market and economy performances will have much less impact on the race between Trump and Harris. The focus of the race is more likely to be placed on immigration policies, social security issues, social equality issues, and trade policies with China. This means that the US White House and Treasury department will now have less incentive to stimulate the economy or the stock market. Of course, this does not mean that the Democratic Party wants to allow the stock market to plummet or risk the country to face an economic recession. As long as the economy is still in the projected scenario of soft landing, we believe that it is not very likely that the Fed will cut rates tooquickly or the Treasury department will boost its spendings aggressively before the election.

Due to a recent slowdown in the growth of US consumption, the inflation pressure in the US has also been significantly reduced. The MoM core CPI in the past two months have been 0.16% and 0.06% only, which have significantly bellowed the 0.2% Fed targets (Figure 5). With the decrease in inflation pressure, the Fed will start to cut benchmark interest rates during the upcoming September meeting, which has basically been fully priced in by the market now. However, an expected rate cut will have limited boosting effects on the economy and stock markets. The first factor is due to the fact that  this has been expected and have been fully priced in by the market now. Secondly, if economic data or market liquidity further deteriorates significantly, the Fed cuts 2 to 3 more times will not be able to hedge all the risk. Based on the current economic data, if the Fed cuts interest rates much quicker than expected, it will not only be interpreted by the market as “panic”, but may also be accused by the Republicans as a move to help the Democrats to win the election. Therefore, we believe that the Fed will avoid cutting rates unless there is solid data to show a recession risk or financial market crisis.

Source: Straits Financial

Source: Straits Financial