Impact of the Upcoming U.S. Election on Markets

Investing.com reports that a potential victory for Donald Trump and Republican control of Congress could result in a "red wave," leading to higher Treasury yields. This scenario would shift the Federal Reserve to a hawkish stance and potentially boost energy and finance stocks.

Capital Economics noted in a Monday report that a Trump win, especially if accompanied by Republican control of Congress, could lead to fiscal expansion and relaxed financial regulations. This might push Treasury yields up and provide a short-term boost to U.S. equities.

According to their analysis, 10-year Treasury yields could rise to around 4.5-5% by the end of 2025 due to expectations of larger budget deficits and a more hawkish Fed.

However, a hawkish Fed might not immediately end the current bull run for stocks, as Trump's expected policies could temporarily support U.S. stock performance, particularly in energy and finance sectors.

On the other hand, a victory for Kamala Harris would likely mean the continuation of policies under President Joe Biden, keeping 10-year Treasury yields around 4%. This stability would support the ongoing AI-driven stock rally, as Harris is expected to maintain the fiscal and monetary policy status quo.

A Trump victory could strengthen the dollar by 5-10% in the following year, although fears about fiscal sustainability might limit these gains. Market predictions might change significantly if a Trump presidency leads to heightened trade tensions, especially with China. Conversely, if Harris wins, the risk lies in more progressive policies if Democrats secure control over both congressional houses.

With only days until the November 5 U.S. election, current polls show Trump with a slight lead over Harris. Ultimately, the electoral outcome’s impact on markets post-election will depend on how much these scenarios have already been priced in, as pointed out by Capital Economics.