US Election Spillover into the Global Financial System - III

Finance Markets and Politics: Investors and investment impulse

In the case of individual and institutional investors, their assurance and confidence in US institutions echo the magnitude of financial investment holdings in the US money markets alike. This fact cannot be overemphasized. In fact, the holdings of central banks worldwide, in both public and private financial institutions and markets in the US, reflect to what extent US events have an effect on the global financial system. This effect is manifested in the wake of the recent elections. According to Rojas and Sillars (2020), the trend in US stockmarket shares demonstrated that it was uncertain whether the Democrats would dominate the election, which would affect the level of future tax reductions that the American conglomerates had enjoyed under Trump. Most observers were anxious about the much-needed financial stimulus package to cushion the failing US economy amid the pandemic. Financial markets such as Dow Jones, S&P 500, Nasdaq, FTSE 100 closed up with 1.3%, 2.2%, 3.8% and 1.7% respectively, after the negatively effect of the uncertainty surrounding the election outcome. At the industry level, the expectation was that Joe Biden would indeed claim victory, which meant secured stimulus packages to support pharmaceutical, banking, and other sectors at home and abroad.

Likewise, the reports of Ossinger and Carson (2020) and Detrixhe (2020) on the market reactions in Luxembourg, Paris, Frankfurt, and Tokyo reveal that the failure of the Democrats to win a Senate majority meant that the global markets would remain volatile in the long-run. It signals an expected policy tension in the US political landscape caused by a Republican-controlled Senate and a Democrat President. This tension was most likely to spill into other areas as well as such differences would have a direct impact on the US fiscal and monetary preferences over the next four years.

References: 

Detrixhe, J. (2020). Traders are positioned for a clear US election outcome. QUARTZ. Retrieved November 3, 2020, https://qz.com/1926288/vix-falls-as-traders-position-for-a-clear-us-election-outcome/?utm_source=email&utm_medium=daily-brief&utm_content=10117912
Ossinger, J. & Carson, R. (2020). Two Bad Election Scenarios Come Back to Haunt Global Markets. Bloomberg. https://www.bloomberg.com/amp/news/articles/2020-11-04/two-worst-election-scenarios-come-back-to-haunt-global-markets?in_source=amp_trending_now_1
Rojas, J. P. F. & Sillars, J. (2020). US election 2020: Wall Street shares rally as 'blue wave' prospects fade. Sky News. Retrieved November 4, 2020, https://news.sky.com/story/us-election-2020-financial-markets-cautious-as-result-too-close-to-call-12123263