SAD-NDA split unlikely to trigger wild moves in market; eye on US elections

Topics Shiromani Akali Dal | BJP | Markets

The US dollar is likely to see extra-normal volatility and so will financial markets everywhere
The Shiromani Akali Dal pulling out of the NDA due to differences over the Farm Bills will not affect the political balance too much. The BJP has a majority in the Lok Sabha on its own. However, this is the third erstwhile ally, which has pulled out of the NDA after differences with the BJP in the not-too-distant past. The Biju Janata Dal broke away from the BJP before the 2019 assembly elections in Odisha, and of course, the Shiv Sena has also parted ways.

 
There may be some mild tremors in the stockmarket due to the exit of the SAD. However those are unlikely to amount to major moves. Most of the stockmarket’s concerns about political risks now centre on the US. Indeed, all global markets are now focussed on the upcoming US elections.

 
The US elections of November 3, 2020 will feature contests of every seat in the 435-seat House of Representatives, 35 of 100 seats in the US Senate, and the Presidency and Vice Presidency. Some 13 state governorships, and many other state and local elections will also be contested.

 
There could be very substantial changes in the US political environment. The Democrats hold a current majority (235-199) in the HoR and opinion polls indicate they may able to defend that. In addition, the Democrats could take over the Senate. The current Republican majority of 53-47 is potentially in danger, since 23 of the 35 seats up for election are held by Republicans. Most opinion polls also indicate Democrats are favoured to win the White House, with Joe Biden unseating Republican Donald Trump.

 
The USA, which is the world’s largest economy, is in bad shape. If the Democrats do wrest control of both Congress chambers and the White House, they would be in a position to pass strong legislation. They appear committed to major fiscal stimulus. Markets would certainly like that. Trump’s handing of the pandemic has also been widely criticised with the US logging over 7 million cases, and suffering over 200,000 deaths. Hence, there could be some positive market response on that front as well, if the White House changes hands along with the Senate.

 
However, there’s five weeks to go and anything could happen. The counting will be slow and controversial with a very large number of mail-in ballots. Trump could contest an unfavourable result, especially if it’s close, with high mail-in ballots.  There may be days, or weeks, of uncertainty and chaos.

 
Through October and November, at least until there’s clarity on the US electoral front, the US dollar is likely to see extra-normal volatility and so will financial markets everywhere. Gold (and silver) price movements also tend to be heavily influenced by the US dollar (a weaker USD usually means higher gold prices). This volatility is already visible and it’s affecting markets everywhere.

 
India is no exception. Markets here are strongly correlated to US movements and we have seen this in the last ten sessions with downtrends in the US stockmarket triggering downtrends in India, followed by a recovery when there was an US bounce. Gold could however, show divergent trends because of traditional festive season Indian demand. But it’s a moot point how much demand there will be, given the stress in the Indian economy.

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Devangshu Datta is an independent market expert. Views are his own.


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