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Key Concerns for Global Markets in a Tight U.S. Election Race

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As the U.S. presidential election between Vice President Kamala Harris and former President Donald Trump approaches, global markets are closely watching the outcome. This election is poised to have significant impacts across regions and sectors, influencing trade, currencies, equities, and emerging markets. Below are some of the most important considerations for global markets:

1. European Markets and Trade Relations

A Trump victory could reignite trade tensions, particularly affecting European markets. German automakers like BMW and luxury goods manufacturers such as LVMH may face a challenging outlook if Trump imposes his proposed 10-20% tariffs on imports to the U.S. Barclays has warned that such tariffs could lead to a “high single-digit” percentage drop in European earnings, posing risks to export-heavy sectors.

On the other hand, a Harris win would be relatively more favorable for European equities, especially in sectors like renewable energy. Companies with significant U.S. projects, such as Orsted and Iberdrola, could see benefits from the U.S. push toward cleaner energy. However, Harris’ proposed corporate tax hike, from 21% to 28%, could impact profit margins for both American and European firms with U.S. exposure.

2. Impact on the War in Ukraine

The U.S. election outcome could have broad geopolitical implications, particularly regarding support for Ukraine in its war against Russia. Trump and some Republican lawmakers have voiced skepticism over continued U.S. funding for Ukraine, which could disrupt aid to the country. In contrast, the Democratic side, led by Harris, is likely to maintain or increase support for Ukraine. Aerospace and defense stocks, which have risen over 80% since the onset of the war in 2022, could be particularly sensitive to this issue.

3. Currency Market Movements

Currency markets are bracing for potential swings depending on the election result. Under a Trump presidency, higher tariffs would likely weigh down the euro, with the EUR/USD exchange rate potentially falling to $1.05. A Harris victory, by contrast, could push the euro above $1.15 as markets anticipate fewer disruptions to global trade.

Additionally, currencies tied to trade with China, such as the Australian and New Zealand dollars, could suffer under a Trump victory due to heightened tariffs. Sweden’s and Norway’s currencies may also be vulnerable to global trade disruptions, while the Canadian dollar might face headwinds if a Harris win leads to expectations of slower U.S. economic growth.

4. China and Global Trade Dynamics

China is a significant player in the global economy, and the U.S.-China relationship is central to world trade dynamics. A Trump win could lead to an escalation of trade wars, which would likely cause U.S. investors to further retreat from Chinese assets. Tariffs and sanctions on Chinese companies could be severe, with estimates suggesting a 60% tariff under Trump could cause Chinese stocks to drop by 13%.

Conversely, Harris is expected to take a more measured approach, with targeted tariffs rather than sweeping economic policies. If Beijing anticipates new U.S. tariffs, it may respond with increased state spending to counterbalance trade losses, potentially providing short-term relief to the Chinese economy.

5. Emerging Markets Under Pressure

Emerging market (EM) equities have been underperforming developed markets for much of the past decade, but they are now showing signs of recovery. Falling U.S. interest rates and easing inflation have created an environment conducive to EM growth. However, a Trump victory, accompanied by the resurgence of global tariffs, could suppress this optimism.

Mexico, given its strong trade ties with the U.S., stands to lose the most under Trump. The Mexican peso, already sensitive to U.S. election news, could face further pressure if Trump reintroduces aggressive trade policies. JPMorgan and UBS have cautioned against taking large positions in EM assets until the election risk passes, with UBS warning of potential 11% losses in EM equities by 2025 if Trump’s tariffs materialize.

Conclusion

The upcoming U.S. presidential election is pivotal for world markets, with the outcome likely to shape global trade, currency markets, and investor sentiment in significant ways. European markets may brace for renewed trade tensions under Trump, while a Harris victory would offer a steadier, more progressive path for global commerce. China remains at the heart of the U.S. trade conflict, with risks on both sides, and emerging markets, particularly those heavily reliant on trade with the U.S., face an uncertain future.

Stocks Plunge: Nikkei Down 13%, European Shares Near Six-Month Lows

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Wall Street braced for a global stock rout, with Japanese shares exceeding their 1987 “Black Monday” loss due to U.S. recession fears prompting investors to flee from risk, anticipating rate cuts to rescue growth. Nasdaq futures fell over 4%, and S&P 500 futures fell around 3% following a sell-off in Japan that spread across European markets. The CBOE’s volatility index, Wall Street’s fear gauge, jumped over 30 points to 53.55, the highest since March 2020. Japan’s benchmark Nikkei average closed 12.40% lower, its largest one-day fall since 1987, while the broader Topix lost 12.48%. Jim Reid, global head of macro and thematic research, noted that thinly-traded summer markets can be more easily roiled, but the moves were grounded in reality, pointing to the Bank of Japan’s new hiking cycle, elevated tech valuations, and a weak U.S. payrolls report.

European shares fell to near six-month lows, with only a handful of stocks trading in the green. The pan-European STOXX 600 index was down about 3%, its lowest since February. Major European indices, including Germany’s DAX, France’s CAC 40, Britain’s FTSE, and Spain’s IBEX 35, all fell more than 2%. The safe-haven yen and Swiss franc surged, and crowded carry trades unraveled, with speculation that investors were unloading profitable trades to cover losses elsewhere. This selling torrent triggered circuit breakers on Asian stock exchanges.

Treasury bonds were in demand, with U.S. 10-year yields dropping to 3.721%, the lowest since mid-2023. A weak July payrolls report saw markets pricing in a 78% chance of Federal Reserve rate cuts in September. Futures imply 122 basis points of cuts in the 5.25-5.5% funds rate this year, and rates of around 3.0% by the end of 2025. Despite emerging weakness in the U.S. economy, Goldman Sachs estimated a 25% likelihood of a recession, whereas JPMorgan analysts assigned a 50% probability. Economist Michael Feroli expects a 50 basis points cut in September, followed by another 50 basis points in November.