Tensions in the global financial market are reaching their peak a day before the extremely close U.S. presidential election. This is because both former President Donald Trump, the Republican candidate, and Vice President Kamala Harris, the Democratic candidate, do not prioritize reducing the fiscal deficit and are proposing various generous policies. Ultimately, if the issuance of U.S. Treasury bonds increases and interest rates rise, it is expected that funds will flow out of the stock market. In addition, there are warnings that if the presidential election results stimulate the worsening wars in Ukraine and the Middle East, a ‘perfect storm’ (a large-scale complex crisis) will hit the global financial market.
Two major fear indices soaring
As of the 2nd (local time), the Merrill Lynch Option Volatility Estimate (MOVE) index, known as the ‘fear index’ of the bond market, has soared 31.06% in the past month. The MOVE index, which was around 85 until the end of March this year, soared to a high of 135.18 at the end of last month ahead of the presidential election. The MOVE index calculates the volatility of government bond prices based on U.S. Treasury option prices. Bloomberg News said, “When the MOVE index soars, other asset markets have often been shaken,” and “The soaring MOVE index shows that anxiety in the bond market and market tension have increased.”
The VIX index, calculated from the option price of the S&P 500 index, also tends to rise when the market becomes uncertain due to a financial crisis, war, or disaster. As of this day, the VIX index was 21.88, up about 7% over the past month. Last week, it rose to the highest level since early August when the global stock market selloff occurred.
The background to this is the judgment that no matter which candidate wins the presidential election, U.S. Treasury bond yields are bound to rise further. As of 5 p.m. on the 1st, the interest rate on 10-year U.S. Treasury bonds was 4.386%, the highest level since July. Traders predict that prices will rise up to 4.5% per year immediately after the presidential election. Typically, when the U.S. Central Bank (Fed) lowers the benchmark interest rate, interest rates on government bonds also fall accordingly. The Fed implemented a pivot (monetary policy shift) in September, and is likely to cut interest rates further this month as well. However, investors believe that the U.S. fiscal deficit will increase, eventually leading to an expansion of government bond issuance, followed by an increase in government bond interest rates and a contraction of the stock market.
Edward Yardeni, an economist and founder of Yardeni Research, said, “No matter which candidate is elected, the fiscal deficit will increase and the government will eventually have to issue government bonds to cover it.” CRFB, a non-profit financial research organization, estimated the fiscal deficit that will increase over the next 10 years to be $3.5 trillion if Vice President Harris won and $7.5 trillion if former President Trump won. Polar Capital predicted, “If former President Trump is elected, the upward trend in bond interest rates may continue for a longer period of time,” and “due to massive spending, the interest rate on 10-year U.S. Treasury bonds could soar to 5% per year.”
Bond yields soar, stocks ‘shake’
Fluctuations in the bond market are directly connected to the stock market. There is a possibility that the New York stock market, which continues its upward rally thanks to artificial intelligence (AI) and the booming U.S. economy, will collapse immediately. This means that there is a high risk that an ‘interest rate seizure’ will trigger an adjustment in the asset market, including the stock market. Goldman Sachs believes that if the election result remains uncertain, the S&P 500 index could fall by up to 15%.
There is also a view that connects Warren Buffett’s Berkshire Hathaway’s increase in cash holdings to a record high with the prospect of a sharp decline in the stock market. According to the third quarter financial report released by Berkshire, Berkshire’s cash reserves increased by $48.3 billion, from $276.9 billion at the end of the second quarter to $325.2 billion at the end of the third quarter. In relation to this, CFRA Research analyst Cathy Seifert said, “Buckshire is a microcosm of the broader economy,” and interpreted, “Buckshire’s cash hoarding suggests a ‘risk-off’ (avoidance with safe assets) mentality.”
However, there is an opinion that it will have an advantageous effect on the stock market if the uncertainty of the presidential election, which was previously reflected, disappears or a clear winner emerges. Investment advisory firm Evercore ISI predicted, “Even if there is a short-term adjustment, the S&P 500 index will exceed 6,000 as of the end of the year in the mid to long term.”
Prospects for the King Dollar Era
The foreign exchange market is also in the midst of a storm. Foreign exchange market participants are especially paying close attention to the possibility of former President Trump winning. If that happens, the value of the dollar will soar, and it is believed that we can enter the era of Trump’s ‘King Dollar’ (dollar super-strength). As of this day, the dollar index, which represents the value of the dollar against the currencies of six major countries, was 104.28. Ahead of the presidential election, former President Trump’s approval rating rose by about 4% in October.
Former President Trump openly advocates a weak dollar, but if you look at his economic pledges, most of them strengthen American protectionism. ‘America First’ is bound to raise prices in the United States and eventually slow down the Fed’s interest rate cuts. Tight monetary policy ultimately leads to a strong dollar.
Even after former President Trump was surprisingly elected in 2016, the value of the dollar jumped by about 6.5% in two months. If former President Trump is elected again, pressure on the strong dollar is expected to increase until the first quarter of next year.
Reporter Kim Eun-jeong kej@hankyung.com
