The upcoming US election has the potential to bring about a Republican victory, which could have significant implications for the US economy and financial markets.
The leading candidates are not committed to austerity measures, suggesting that a Republican win could worsen the US budget deficit. The economic plans proposed include a continuation and possible expansion of the Tax Cuts and Jobs Act (TCJA), with discussions around lowering the corporate tax rate to 15%. This could result in a substantial fiscal cost, estimated at USD 600 billion over the next decade. The revenue impact of Trump's tariff policies is uncertain, as it depends on import volumes and could be complicated by legal challenges and congressional opposition. A Republican victory could lead to further import substitution, which would complicate the revenue landscape. The widening deficit under a Republican administration could raise concerns about fiscal sustainability.
A Republican win could provide a boost to US equities due to anticipated deregulation and tax cuts. However, increased tariffs and rising bond yields could create challenges for the market. International equities may be hindered by trade uncertainties linked to tariffs. A Republican victory could be detrimental for fixed income assets due to the anticipated widening of the budget deficit and inflationary policies. However, excessive post-election yield increases could present an attractive entry point for fixed income investments.
The potential for a Republican victory could strengthen the US dollar due to higher yields and the economic environment under a Republican administration. Market participants will closely monitor the evolving political landscape and its implications for economic policy. The potential for tax cuts and deregulation could invigorate the US economy, but the risks associated with tariffs and a widening deficit will need to be carefully considered. Investors will need to weigh these factors as they position themselves for the potential outcomes of the election.