As financial markets brace for key global events, the focus is not only on Chancellor Rachel Reeves’ upcoming budget in the UK but also on the U.S. election just days away. With Donald Trump gaining momentum in the polls, traders and investors are assessing what a second Trump presidency could mean for the economy, both domestically and internationally.
Recent jitters surrounding Reeves’ budget stem from concerns over higher borrowing and potential tax increases, which could stifle consumer spending and dampen business confidence. However, the U.S. election looms large over global markets, with its outcome set to influence international economic dynamics, including in the UK.
Despite the uncertainty, markets have remained relatively calm. The U.S. stock market, represented by the S&P 500 index, has seen minimal volatility, with the index holding steady near record highs. Bond markets, meanwhile, have experienced a modest rise in yields, with ten-year U.S. Treasury notes now yielding 4.2%. Although this represents a slight increase, it falls short of the nervous peaks seen in April when yields reached 4.7%. The U.S. dollar has also shown modest strength, with the pound slipping from $1.34 to $1.30 over the past month, but these movements have been far from drastic.
Trump’s Odds Improve in Key Markets
As the U.S. election draws nearer, betting markets and trading platforms are shifting their odds toward a likely Trump victory. Polymarket, an American crypto trading platform, currently gives Trump a 64% chance of defeating his rival, Kamala Harris. In the UK, Betfair Exchange similarly places Trump’s odds of winning at 60%, marking a noticeable shift from just a month ago when Harris held a slight lead.
While betting markets famously underestimated Trump’s chances in 2016, the current trend reflects growing confidence in his ability to secure a second term. For investors, the prospect of a Trump victory is seen as positive for the stock market, but potentially damaging for the bond market. “The markets think a Trump victory would on balance be good for share prices and bad for bonds,” noted Hamish McRae, pointing out that financial markets often prioritize business continuity over political ramifications.
This perspective stands in stark contrast to the concerns of political analysts, who argue that the election could have far-reaching implications for policy, trade, and international relations. However, financial markets appear more focused on the fundamentals of corporate profits and a stable job market, both of which have supported record-high U.S. share prices.
Strong Corporate Profits Bolster Confidence, but Risks Remain
Corporate profits in the U.S. have remained robust, and the job market continues to show resilience. These factors have driven stock prices to record highs, with investors largely optimistic about future growth, provided that economic fundamentals remain intact. As Calvin Coolidge famously said in 1925, “The chief business of the American people is business,” a sentiment that resonates with today’s market outlook. For many Americans, as long as they can continue to invest, buy, and prosper, political concerns take a back seat.
However, McRae warns that the positive investment climate in the U.S. is not without its vulnerabilities. He draws a parallel to the Roaring Twenties, a period of exuberant economic growth that ultimately ended in the 1929 Wall Street crash. While today’s markets are not experiencing the same level of euphoria, there are concerns about the U.S. fiscal deficit and the potential for inflation to resurface. Should inflation rise and Treasury yields climb to 5%, the ripple effects would be felt worldwide, including in the UK.
Impact on UK Markets
The UK stock market, which has lagged behind the U.S., is vulnerable to any significant downturn in American equities. The entire UK stock market is worth less than the U.S. technology firm Nvidia, a disparity that highlights the UK’s relative underperformance. A sharp correction in U.S. stock prices could easily spill over into the UK, with both markets closely linked by global investor sentiment.
Additionally, rising U.S. Treasury yields could push up yields on UK government bonds, known as gilts. Investors will need to prepare for the possibility of higher borrowing costs and inflationary pressures, regardless of the U.S. election’s outcome.
A Test for Investors
In the short term, a Trump victory may indeed be beneficial for U.S. stocks, reflecting market confidence in his pro-business policies. However, the long-term consequences of another Trump presidency are far less certain. As McRae notes, “Our job as savers and investors is to make ourselves as bullet-proof as we can.” The coming week, with its combination of a critical UK budget and a high-stakes U.S. election, will be the first real test of that resilience for global markets.