Navigating the Turbulent Terrain: Investors Brace for High-Stakes US Presidential Debate

As investors eagerly await the first US presidential debate between Vice President Kamala Harris and former President Donald Trump, the markets are already exhibiting signs of heightened volatility. With the election just around the corner, the stakes have never been higher, and the potential impact on various asset classes is palpable.

Bracing for a Pivotal Moment in US Politics

Stocks: Navigating the Shifting Landscape

Equity investors will be closely watching how the candidates' plans for taxes and tariffs unfold, as these areas present stark differences between their respective platforms. While Trump's proposed tax cuts could potentially boost S&P 500 earnings by around 4%, Harris' plan to increase the corporate tax rate to 28% could reduce profits by approximately 8%, according to Goldman Sachs estimates. On the trade front, Trump's rhetoric around tariffs, including the possibility of a 10% across-the-board levy and even steeper penalties on Chinese-made goods, could have significant implications for sectors with high direct exposure to China, such as semiconductors, industrials, materials, autos, and healthcare. Stocks like Nvidia, Broadcom, Apple, Tesla, Otis Worldwide, and Agilent Technologies are among those worth monitoring.Conversely, Harris' messaging suggests a more measured approach to China, potentially signaling a shift away from the escalating tensions between the world's two largest economies. This could have implications for the J.P. Morgan basket of stocks with high direct exposure to China.Rather than taking a definitive stance on market direction, equity traders may be better off focusing on volatility-based strategies, such as a so-called straddle around the debate date, which allows them to profit from market swings regardless of the direction.

Bonds: Bracing for Fiscal Uncertainty

The bond market has already experienced significant shifts in the aftermath of the June debate, with the odds of a Trump victory leading to a steepening of the yield curve as traders adjusted their positions to account for the potential inflationary impact of his tax-and-trade policies.Wall Street bond watchers are in rare agreement that the US fiscal outlook is set to worsen, regardless of the election outcome, with the composition of Congress playing a critical role in determining future spending plans. Investors will be closely listening for any insights into the candidates' fiscal plans, as fears of a deteriorating debt and deficit outlook could further accelerate the steepening of the yield curve.

Currencies: Navigating the Shifting Geopolitical Landscape

The currencies of major US trading partners, such as Mexico and China, have historically been the most sensitive to Trump's campaign rhetoric around tariffs. During the first presidential debate in 2020, the Mexican peso weakened sharply in real-time as Trump and Biden spoke, underscoring the potential for currency volatility.Beyond this, the candidates' positions on the broad value of the US dollar are of critical importance to investors. While Trump's tariffs would, at least in the short term, support the greenback, his argument that the world's reserve currency is too strong could introduce further uncertainty and volatility.Under a Harris administration, the potential for less uncertainty around US policymaking, from trade and immigration to foreign policy, could weigh on the haven dollar. Additionally, the expiration of Trump-era tax cuts could provide the Federal Reserve with more room to ease monetary policy, further dragging the greenback lower, according to Wells Fargo strategists.As investors navigate this turbulent terrain, the upcoming presidential debate promises to be a pivotal moment in shaping the future of the US economy and its global influence. With high stakes and heightened volatility, the need for informed and strategic decision-making has never been more crucial.