Chief China Strategist
The first presidential debate between former President Donald Trump and incumbent President Joe Biden has set the stage for a highly contentious and closely watched 2024 U.S. election. A post-debate CNN flash poll surveyed 565 registered U.S. voters who watched the debate. The results revealed that 67% believed Trump performed better, a significant increase from the 55% before the debate. Biden underdelivered, failing to meet even the relatively low expectations, often appearing lost during the debate.
As both candidates poll neck-and-neck, financial markets are bracing for potential volatility, with investors keenly observing shifts in economic and political landscapes. As the debate proceeded, U.S. Treasury yields ticked up modestly, with the 10-year yield rising by as many as four basis points to 4.32%. Trump's campaign pledge to extend parts of the 2017 tax cuts, funded by higher domestic economic growth and increased tariffs, is generally viewed by investors as worsening the fiscal deficit and potentially raising inflation. According to estimates by the Congressional Budget Office, extending the 2017 Tax Cuts and Jobs Act’s cuts to individual income tax would increase primary deficits over the 2025-2034 period by $3.3 trillion.
S&P 500 eMini futures ticked up slightly as Trump outperformed Biden in the debate. Investors generally expect corporate America to benefit from lower taxes and fewer regulations under a second Trump term compared to a Biden administration. Meanwhile, China’s equity benchmark CSI300 and Hong Kong’s bellwether Hang Seng Index opened lower but reversed all losses into gains, as neither Trump nor Biden mentioned China significantly. Investors had feared that the two presidential candidates would engage in competitive China-bashing and threaten more hostile policies beyond the much-discussed tariffs.
Predictably, following the first presidential debate, investors are likely to increasingly price in the possibility of a Trump presidency 2.0.
The 2024 election calendar features pivotal events that could significantly sway market sentiment. The CNN presidential debate marks the beginning of a series of high-stakes political showdowns. Upcoming milestones include the Republican National Convention from July 15-18 and the Democratic National Convention from August 19-22. Except for delegates from 14 states, those from other states have some leeway not to cast their votes for the pledged candidate of their party. Hypothetically, though unlikely, they may be able to replace their party’s presumptive candidate for the presidential election. Election Day on November 5 will be followed by the Electoral College officially casting votes for President on December 17, with the inauguration set for January 20, 2025.
Current national polling indicates a tight race. However, the election outcome hinges on key swing states, including Michigan, Wisconsin, Pennsylvania, Arizona, Georgia, and Nevada. Current polls suggest a tight race nationally, with Trump holding a slight edge in these critical battlegrounds. Voter turnout and preferences in these regions will be crucial in determining the next president and, by extension, the direction of economic policy.
Beyond the presidential race, the 2024 ballot includes several crucial contests that could reshape the political landscape. All 435 House seats are up for election, with Republicans currently holding a slim majority. The Cook Political Report rates more than 20 seats as toss-ups, indicating a highly competitive race for control of the House. The current Republican majority may flip, and Trump, if he wins in November and returns to the White House, may not have a Republican House to his aid.
In the Senate, Democrats face a challenging map, defending 23 of the 34 seats up for grabs. This presents Republicans with an opportunity to gain a majority and potentially alter the legislative landscape for the next administration.
At the commencement of the next Congress, lawmakers will need to address the expiration of the revised debt limit suspension on January 1, 2025. While the Treasury has room to maneuver to avoid a default for several months, Congress will need to resolve the issue before a deadlock causes investor anxiety and market volatility in both bonds and stock markets.
Trade policy remains a critical area of focus for investors. Both Trump and Biden have signaled preference for more restrictions, which could exacerbate global supply chain pressures and increase costs for imported goods. Trump favors imposing more tariffs, including a 10% levy across the board on goods from all countries and a punitive 60% tariff on Chinese goods. In contrast, Biden is more inclined toward specific trade restrictions targeting particular industries, technologies, and supply chain chokepoints.
As we argued in a previous article, both Trump and Biden will adopt a hardline stance on trade and economic relationships with China, increasingly viewing these issues through the lens of national security. Nonetheless, the plausibility of a 60% punitive tariff on China suggests that an increasingly likely Trump presidency 2.0 could negatively impact the Chinese equity market and the Chinese yuan. The prospect of persistently escalating fiscal deficits and rising fiscal indebtedness in the U.S. may keep U.S. interest rates high, as discussed in this recent Saxo article. While neither Trump nor Biden seems to have a solution for deficits and debts, bond investors tend to be more worried about a Trump presidency due to his propensity to cut taxes.
As higher U.S. bond yields could drive up the USD, the Chinese yuan may face more headwinds, compounding those from a turbulent trade environment.
For Chinese equities, some potential negatives from adverse trade policies and higher U.S. bond yields under a Trump presidency may be mitigated by spillover effects from a strong U.S. equity market, with U.S. corporations potentially benefiting from additional tax cuts and regulatory relaxation.
The next significant event for the Chinese equity market is the Third Plenary Session of the 20th Central Committee of the Communist Party of China, or the Third Plenum, scheduled from July 15 to 18. According to a statement from the Politburo meeting on June 27, the Third Plenum will discuss and decide on “issues of further comprehensively deepening reform and advancing modernization with Chinese characteristics.” For a discussion of China’s reforms, you can refer to our previous articles on June 12 and June 3.
The first presidential debate has underscored the intense scrutiny and high stakes surrounding the 2024 U.S. presidential election. As the candidates continue to vie for the presidency, the financial markets are responding to the shifting dynamics. Investors are closely monitoring the political landscape, with key dates and battleground states playing crucial roles in shaping market expectations. Trade policies and economic strategies of the candidates, including those impacting fiscal deficits and regarding China, are pivotal factors influencing market sentiments.
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2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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