US and European elections, high volatility on the markets: the possible impacts

The 2024 will go down in history as an election year, with a record number of people going to the polls. The high concentration of elections has also caused a record volatility on the markets, particularly in Mexico, India and South Africa.

2024 election year

More recently, French President Macron’s decision to call new elections sent French bonds and stocks tumbling, weakening the euro. On the contrary, the unexpected decision of the prime minister Rishi Sunak to call early elections went almost unnoticed in the English markets. What will be the impact of the next elections on European, English and American markets? Steven Bell, Chief Economist EMEA of Columbia Threadneedle, outlines the possible scenarios in the weekly market outlook.

As for the United States, whose elections are scheduled for November, there are fears that Trump’s re-election could trigger a surge in bond yields, although we consider this unlikely; rather we expect Trump cut taxes and raise tariffs on US imports by 10% across the board. The net effect on the fiscal deficit may be modest, while on monetary policy, the Fed is independent and although Donald Trump has expressed his intention to want to fire Chairman Powell, such a move is unlikely to change real policy . There is also a strong consensus in favor of existing agreements and there is no longer a call for the White House to exercise greater control over the central bank, also considering the presence of important legal and other barriers.

USA unknown: Biden or Trump?

So far as Joe Biden should get re-elected, a fundamental factor will be the composition of the Congress. Indeed, Biden’s efforts to raise taxes have been hindered by moderate Democrats in the Senate, who are very effective despite their slim majority. However, it is important to consider that many of the moderates now present are about to retire and their successors are generally much more left-wing. According to a recent Goldman Sachs conference, a clear victory for the Democrats could lead to significant political changes, including a 25% increase in the corporate tax rate. What are the chances of this happening? Of the 34 Senate seats up for grabs this year, only 5 look set to change hands, and 4 of those are held by Democrats, who need to regain control of the chamber. So, while a clear Democratic victory through the use of radical policies remains a possibility, it is certainly not the main scenario.

In Europethe last elections ended with a significantthe advance of the far rightwho will probably try to limit B’s powerruxelles, agotaking numerous steps backwards on policies regarding climate change and immigration. At the national level, we expect right-wing parties to follow the example of Italian Prime Minister Giorgia Meloni, who has gradually moved towards the centre. In particular, almost all right-wing parties in Europe have abandoned plans to leave the EU, also following what happened in the United Kingdom, and the ECB remains strongly independent. In our opinion, “the mad purchase of German Bunds seems exaggerated and we do not expect a European financial crisis.”

United Kingdom, Labor towards (clear) victory

In the United Kingdom – the expert points out again – polls suggest that Labor will have a landslide victory. The party leaderKeir Starmer, appears to be moderate and prudent, with very ambitious spending plans, particularly regarding investment, and will probably not want to stick to the current government’s unrealistically low spending plans in unprotected areas. Although taxes are all but set to rise, Labor has promised to leave key rates of income tax, insurance and VAT unchanged. We believe the fiscal deficit is improving however and the UK economy is recovering better than expected. Changing the way the Bank of England emptying its balance sheet could generate many billions for the Treasury; we therefore expect a large impact on the markets and monetary policy in the United Kingdom with a possible rally in Gilts.

Just today, meanwhile, spotlight on the Bank of England which is preparing to confirm unchanged interest rates, despite the more than positive data on inflation, which has returned to line with the bank’s target central 2%.