Investors were treated to a shocker on Friday when President Trump announced that he and First Lady Melania Trump have tested positive for Covid-19. This came after news that one of his closest aides, Hope Hicks, who flew with Trump to the first presidential debate in Cleveland, had contracted Covid-19.
President Trump’s physician has said in a statement that Trump is expected to carry out his duties “without disruption.”
Exogenous shocks like this tend to trigger a kneejerk reaction, and markets unsurprisingly went into risk-off mode. At the time of writing, US equity futures are down more than 1% while October futures for the CBOE Volatility Index (VIX) spiked as much as 12% before easing downwards. Hong Kong and Chinese exchanges were closed today due to China’s National Day, and the Chinese exchanges will only open after 8 October.
In line with a broad risk-off move, the US dollar (USD) weakened against the safe-havens, the Japanese Yen (JPY) and Gold, and broadly strengthened against emerging market (EM) currencies. The offshore Chinese Yuan (CNH) was interestingly range-bound against the USD instead of weakening as we would expect an EM currency to do, which gives credence to the burgeoning idea that the Chinese currency is taking on safe-haven characteristics as China leads the global economic rebound.
We expect markets to fluctuate until investors get a sense of how the dust from this event will settle. The key questions are 1) how would this affect the election outcome, and 2) whether institutional stability in the US might be impacted if Trump’s (or Biden’s) health is adversely affected.
With regards to impact on the election outcome, one scenario is that this event further strengthens the narrative that President Trump has been incompetent in managing the Covid-19 pandemic and has failed to take sufficient precautions to ensure his personal safety as a leader.
This would mean that Biden’s lead in the polls is more likely to hold up as the election nears, which further diminishes the tail-risk of a contested result. This scenario should be, on a net basis, positive for risk assets. Given that a Biden win is expected to be less supportive for the USD versus a Trump win, we should also see USD weakness under this outcome which should be positive for emerging market assets and currencies.
An alternative scenario, however, is that President Trump could enjoy a wave of support out of sympathy, similar to when UK Prime Minister Boris Johnson contracted Covid-19 earlier. Under this scenario, Biden’s lead would narrow and the risk of an extended contest would increase.
In this scenario, we should expect further volatility in risk assets and relative USD strength given that a Trump win is seen to be more supportive of the USD versus a Biden win.
Finally, it has been reported in media that there is an increase in online searches on whether Biden has contracted Covid-19 as well. This is not a frivolous question as Trump likely contracted Covid-19 before he shared the stage with Biden at the debate on 29 September. Should Biden also test positive for Covid-19, we would expect an extended period of uncertainty and market volatility given that Trump and Biden are both in their 70s and are at high risk of suffering adverse health consequences from Covid-19.
Broadly, we believe it is time for caution but not panic. We remain constructive on the long-term outlook of markets as the broad fundamentals of the global economy paint a picture of gradual recovery and the stance of policy makers remains supportive. We expect more fiscal support in the US to come after the election, if not before. As for election-related uncertainties, they are expected to ease after 1Q 2021. We see this bout of weakness as providing potential opportunities to add risk if prices become sufficiently attractive.Disclaimer applicable to recommendation
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