A majority of financial market strategists polled by Reuters expects President George W. Bush to beat Sen. John Kerry in the U.S. presidential election, and see a Bush victory as clearly more bullish for equity markets.
But analysts’ expectations of how the dollar, U.S. Treasuries and the U.S. budget deficit would fare under either candidate are less conclusive.
Results of a Reuters global poll undertaken from Sept. 27 through Sept. 30 showed an overwhelming majority of analysts — 21 out of 24 responding to this question — anticipate Bush will win the Nov. 2 election.
The survey was undertaken before Thursday night’s first televised debate between the two candidates.
Of the major financial markets, stocks are the only one with a clear preference: Bush.
On the likely direction of the S&P 500 stock index, 15 analysts said the S&P would rise if Bush wins. But none saw it rising if Kerry prevails. If Kerry wins, 17 analysts expect the index to fall, mainly because Kerry is perceived as less business friendly than his Republican rival.
“If you see a reaction on the financial markets, it will be in the equity markets,” said Guy Verberne, head of international economics at Fortis Bank in Amsterdam.
“I think equity markets rather favor George W. (Bush): he is more supportive of the things they like and that’s private enterprise, privatization,” Verberne added.
Indirectly, a clear positive or negative reaction on U.S. stock markets could ripple across other financial markets as well. Currency analysts warn that the dollar could take its cue, in part, from stocks’ post-electoral trajectory.
Fiscal distinctions examined
The U.S. government bond market’s response to a win by either candidate is more murky, but broad perceptions about different approaches to fiscal policy influence analysts’ forecasts.
The fact that 17 analysts reckon Treasury yields would rise if Bush gets a second term in office, outnumbering the 9 analysts who reckon yields would rise under a Kerry administration, in part signals that some think Kerry might do more to rein back the U.S. budget deficit.
“If Bush wins, I think he will take this as a license to spend more and the deficit will widen,” said Robert Balan, head of financial markets research at Saxo Bank in Middletown, New Jersey. Bush would probably be more inclined to extend the duration of the tax cuts he introduced, other analysts said.
If bond yields fell under Kerry, that could in turn weigh on the dollar, because dollar-denominated deposits would become less attractive to foreign investors.
“Markets will initially view a Kerry election as meaning a tighter fiscal stance, a positive for the bond market, but a negative for the U.S. dollar, since fewer (Federal Reserve) rate hikes would be needed if fiscal policy is more restrictive,” said Avery Shenfeld, managing director and senior economist at CIBC World Markets in Toronto.
But the poll results show that Kerry is not expected to be markedly more austere in reining back the budget deficit than Bush.
One of the biggest potential distinctions between the pro tax-cut Bush administration and a potential Kerry one, is fiscal policy. But only a handful more analysts responding see Kerry being able to shrink the budget deficit (18 respondents) than Bush (13 respondents).
Whether either one would bode better for U.S. economic growth is unclear, although expectations of more elevated Treasury yield levels under Bush could hint at expectations of a higher inflation environment or stronger economic growth, or both.
On dollar policy, there is essentially nothing to choose between the two candidates, analysts said.
Poll results showed comparable numbers of respondents expecting the “strong dollar” policy that is officially espoused by the Bush administration to remain in place, regardless of which candidate wins. But in any case, most currency analysts see the policy as empty and outdated.