Trading Week Opens in Wake of Biden’s Dropout

Shockwaves are making their way across market floors around the globe this morning, 22 July, as traders absorb the withdrawal of incumbent Joe Biden from the presidential race in the United States. Let’s take a look at the potential effects this surprise announcement could have on the first trading day of the week: 

Economic Turbulence Ahead?

Uncertainty is the name of the game on global market floors this morning. With the Democratic Party facing the task of selecting a new nominee, the immediate reaction from investors could lead toward heightened price volatility. 

Markets generally favour stability and predictability, and such a significant political shift tends to disrupt both. The trading day last Thursday, 19 July, ended with losses of 0.7% and 0.9% respectively for the S&P 500 and the Nasdaq (US-TECH 100), and this trend may well continue for these indices as a new session opens today. The initial response to Biden’s withdrawal from the race may be a sharp decline in stock prices as investors seek to hedge against potential risks.

A significant change in political leadership often leads to increased market uncertainty. Investors may react differently depending on the new Democratic frontrunner and their perceived policies towards businesses and the economy. This unpredictability can cause fluctuations in stock prices as the market adjusts to the new political landscape. Additionally, the withdrawal almost guarantees a win for the opposition, further intensifying market volatility as investors brace for potential shifts in fiscal policies.

In the short term, this increased uncertainty could lead to a more risk-averse market environment. Investors may prefer safer, more stable investments over riskier stocks, seeking to protect their portfolios from potential downturns. As the political scenario unfolds and the new candidate is revealed, market participants will continuously reassess their strategies, contributing to ongoing fluctuations in stock prices.

When the Dust Settles

Despite the initial volatility, certain sectors may benefit from the political shift. The new frontrunner's policies could be perceived as more favourable towards specific industries, potentially supporting U.S. equities. For instance, if Vice President Kamala Harris becomes the nominee, the market might anticipate continued or expanded fiscal policies such as tax cuts and increased government spending, particularly in areas like the military. These measures could stimulate the economy and boost corporate profits, driving stock prices higher in the short to intermediate term.

However, accelerating economic growth could also bring higher inflation in the longer term, potentially leading to a shift in monetary policy from anticipated rate cuts to rate hikes in the coming years. This dynamic would require careful navigation by investors as they balance short-term gains with long-term economic considerations.

Moreover, the uncertainty surrounding the new Democratic nominee, with names like Michelle Obama, Joe Manchin, and Gavin Newsom all being floated, could also impact other investment assets. Precious metals like gold (XAU) and silver (XAG), often seen as safe havens during times of economic and political uncertainty, might attract more investment. Investors may seek to hedge against the unknowns of the new candidate’s policies until a clearer picture emerges. The withdrawal of a sitting United States President from a reelection race is an unprecedented event that could heighten fear and caution among investors, leading to a preference for more stable investments.

Cryptocurrency markets, like those for Bitcoin (BTCUSD) and Ethereum (ETHUSD) may also see a rally following Biden’s withdrawal. Donald Trump and his running mate, J.D. Vance, have both endorsed digital coins in the past, and a new administration under their leadership could be perceived as more favourable towards the crypto ecosystem and drive positive sentiment and increased investment in digital assets. (Source: FT)

Conclusion

In summary, while Biden's exit from the presidential race introduces significant uncertainty and short-term volatility, it also opens up potential opportunities across various sectors. Investors will need to stay informed and agile, ready to adapt to the evolving political and economic conditions to navigate the market effectively.