Early results from the U.S. presidential election are beginning to come in. According to the reported counts, Republican candidate Donald Trump has gained an advantage over his Democratic opponent Kamala Harris. While vote counts continue in critical swing states, markets are experiencing high fluctuations with the possibility of a Trump victory.
With the opening of Asian markets, traders quickly returned to the “Trump trade,” which had recently seen a pullback amid expectations of a close race. The U.S. dollar surged approximately 1.7%, marking its largest jump since March 2020. The yield on the U.S. 10-year benchmark rose by around 15 basis points, climbing above 4.44%, a four-month high.
On the other hand, emerging market currencies are weakening against the strengthening dollar. An index representing these currencies saw its largest drop since March, falling by up to 0.6% as Trump gained the lead in two key swing states. An index of Asian currencies also dropped 0.8%, with the offshore yuan leading the decline, falling over 1.1% against the dollar. Should Trump win the race, his pledge to impose tariffs of 60% or more on Chinese imports is dampening sentiment towards the Chinese economy.
According to the current results, Trump has defeated Harris in the contested states of North Carolina and Georgia. In the remaining five critical swing states, although the margin is narrow, Trump is leading the race. The next president will need to secure 270 electoral votes to take office. Based on data compiled by Bloomberg, Trump has reached 247 votes, while Harris trails with 214. The final outcome from the swing states will ultimately determine the winner.
Meanwhile, Republicans have secured a majority in the U.S. Senate by winning 51 of the 100 seats, granting them significant leverage in battles over taxes and spending. Even if the current situation shifts and Harris wins the presidential race, any new tax legislation would still require Senate approval. Besides, in the House of Representatives, Republicans currently lead with 186 seats.
As a result, while it will take some time for the U.S. election results to be finalized, the potential victory of Trump and the Republicans is already shaping global markets. Trump’s pledged pro-growth policies, tax cuts, and trade measures are expected to increase the U.S. fiscal deficit and fuel inflationary pressures, thereby strengthening the U.S. dollar.
As the U.S. labor market continues to cool moderately and inflation trends towards the target rate, the Federal Reserve is expected to remain on an easing path. However, if Trump wins and implements his promised policies, the Fed's room for rate cuts in the upcoming period could be limited.
On the other hand, if the results from the swing states shift the balance toward Democratic candidate Harris, it’s essential to consider that a sharp market reaction contrary to the current pricing could ensue. Fiscal and trade policies under a Harris administration would likely create less complexity for the Fed's policy path, shifting the focus back toward the current macroeconomic outlook of the U.S. economy. '
In the case of a divided government, any reversal in pricing may remain somewhat limited. This scenario could sustain demand for safe-haven assets due to the uncertainty it brings. However, implementing significant fiscal changes may become more challenging for the new president.
Finally, before the election-driven market turbulence settles, the Federal Reserve’s monetary policy meeting early Thursday will be closely watched. Recent U.S. data justifies the Fed’s easing stance, and a quarter-point cut is widely anticipated at this week’s meeting. However, in the event of a sweeping Republican victory, uncertainty around the Fed’s future policy path may increase. As the policies implemented reshape the macroeconomic outlook, the Fed may need to adjust its policy course.
Gold Declines as Traders Price in Potential Republican Victory
As traders price in a potential victory for Trump and the Republicans, precious metals are declining. With U.S. Treasury yields and the dollar surging sharply, bullion gold has retreated to around $2,710 per ounce. The rising dollar has made gold more expensive for buyers, while higher yields have increased the opportunity cost of holding gold. If the election concludes as early results suggest, the pressure on precious metals is likely to persist.
On the other hand, the policies pledged by the Republican candidate are anticipated to increase the U.S. debt-to-GDP ratio and reverse the recent easing in inflation due to higher tariffs. This scenario is likely to lead to increased demand for gold as a hedge in the upcoming period.