The announcement – not entirely unexpected – that Joe Biden won't seek to win a second term of office has not so far produced a significant shift in the global investment mood. China eased monetary policy today, meanwhile.      

The dollar and yields on US Treasuries eased early this morning. NASDAQ 100 and S&P 500 stock futures were down slightly as investors in Europe digested US President Joe Biden’s announcement yesterday that he will not run for re-election in November.

Financial markets appeared so far relatively calm after Biden’s announcement, which had followed days of increased calls by senior Democrat Party figures for him to quit amid concerns that Biden was becoming too physically and mentally frail to serve a second term. At 81, Biden’s recent TV debate opposite Donald Trump (78), in which Biden stumbled over answers and appeared unable to complete sentences, sent Democrat Party officials into a panic. Since the assassination attempt on Trump in Pennsylvania a week ago, the former President has seen a further boost to his poll rating lead over Biden. 

“News that President Biden has taken the chance for a dignified exit from the election campaign will be music to the ears of many Democrats, but perhaps less so to Donald Trump who will likely see a new challenger as a greater threat than President Biden was in recent months. This will be especially the case with Kamala Harris who represents a continuity with the Biden administration, but brings about a different style,” Lindsay James, investment strategist at Quilter Investors, said. 

“Markets have been increasingly pricing in a Trump victory in November, with smaller companies buoyed by expectations for broad import tariffs as well as the growing likelihood of a rate cut as early as September. J D Vance as Trump’s Vice-Presidential choice has been a divisive one, given he is a man known for wanting to tighten regulation on banks whilst loosening it for cryptocurrency trading,” James continued. “Much will depend on whether the Democrats can unify quickly around a new candidate, just four months ahead of the election, and whether that candidate can win over the swing states at a time when Trump clearly has the momentum. Whilst it will remain an uphill struggle, this has opened the race once again, with the age of candidates likely to remain a bone of contention but one that would now favor the Democrats.”

The chief investment office at UBS Global Wealth Management said Biden’s withdrawal and endorsement of Harris leaves her “well positioned” to capture the nomination. 

“But she still must convince convention delegates, who are no longer bound to support Biden, that she is the individual best positioned to defeat the Republican nominee in November. We expect her to emphasize the continuity of Biden’s platform, her service as vice-president, and her ability to appeal to women, younger voters, and voters of color,” UBS said. “Second, we would not expect a major shift in policy priorities from any of the top Democratic contenders on the issues of concern for investors. The continuity would be clearest if Harris becomes the nominee. But we would not expect any Democratic nominee to deviate significantly from Biden’s focus on climate change, increasing scrutiny of anti-competitive practices by large businesses, and maintaining pressure on China over its trade practices.”

UBS said that before Biden’s exit from the race, it had seen a 60 per cent chance that Trump would retake the White House, with a 45 per cent probability of a “red sweep.” It had also seen a 15 per cent likelihood of a Trump presidency with a split Congress, a 30 per cent probability of a Democratic win with a split Congress, and a 10 per cent probability of a “blue sweep.”

China eases
In China, meanwhile, markets were affected today by the People’s Republic of China’s cut to the seven-day reverse repo rate for the first time in almost 12 months to 1.7 per cent, down 10 basis points. China is seeking to revive an economy weighed by concerns of decelerating economic growth. Chinese banks have lowered one and five-year loan prime rates by 10 bps each to 3.35 per cent and 3.85 per cent, respectively, close to record lows.

Political implications
As far as the wealth management sector in the US is concerned, the prospect of Biden losing, possibly heavily, to Trump – with the House and Senate also moving under Republican control – would have increased the likelihood, for example, of yet higher US tariffs, while perhaps lessening prospects of further large tax hikes on “the rich.” Against that, the Republicans have taken a more populist turn, as shown by Trump’s choice of J D Vance as his vice president and running mate, suggesting that a return of Republican rule in Washington would be very different from the more “Reaganite” policy mix (free trade, economic liberalism and strong support for NATO) of earlier decades. It is worth noting that under Biden and Trump, protectionism has gained ground, and neither politician or their party seem greatly focused on high US public debt.

UBS said a Trump victory – especially if supported by a Republican majority in Congress – would be likely to raise market expectations of tax cuts and lighter business regulation, while adding to concerns over higher trade tariffs. Primary beneficiaries of regulatory changes could include the financial services sector, while higher tariffs on imports could harm US companies with global supply chains. A Democratic administration would be likely to continue supporting initiatives benefiting green energy, efficiency, and electric vehicle makers.

“In the near term, we should expect some market volatility as investors digest the news. We have seen some rotation toward 'red' sectors and away from 'blue' ones in recent weeks as recent momentum has favored the Republican party. That could at least partially reverse in the coming days as markets parse the latest developments,” UBS said. “Investors should remember that US political outcomes are far from the largest driver of financial market returns, or even sector performance. Economic data and Fed rate cut expectations remain at least as important. In addition, much can still change ahead of November's ballot and a range of outcomes remain possible.”