Source: CICC Commentary Author: Zhang Jundong, Fan Li, Zhang Wenlang With the expectation of a basic stable market and interest rate cuts in September [1], trading style has changed. After the June CPI and retail sales data were released, large-cap growth stocks led by AI concepts have clearly pulled back, while gold, small-cap stocks, and real estate, consumer, manufacturing, and bank-related stocks in the Dow have performed relatively well. The trading main line behind seems uncertain, and there has been a large discrepancy in the market's judgment on whether the US economy will have a "soft landing" or a "hard landing" after interest rate cuts. Is the market currently experiencing a short-term cut in style or a long-term change in style? We believe that with the basic expectation of interest rate cuts being largely fulfilled, the space for interest rate cut trading ("buying on expectations") may be significantly squeezed, while the "cyclical trading" after interest rate cuts is gaining momentum (see "All kinds of interest rate cut trading are the same, but the trading logic after interest rate cuts is different"). Unlike interest rate cut trading, cyclical trading mainly prices the recovery of terminal demand and the restart of the economic cycle after interest rate cutting. Its supporting logic is the resilience of US household demand, large fiscal and re-industrialization, and more deeply, the "realization from empty to real" of the total scale and structural resilience of the US economy. Under the support of total-scale resilience of the economy, the interest rate cut may be relatively limited (that is, a "shallow" interest rate cut), which is more beneficial to the real economy, especially profitable-supporting enterprises, and has a relatively limited boost to valuation. In terms of pace, Trump Trade 2.0 may accelerate the arrival of cyclical trading, given the increasing probability of Trump's recent election victory, stronger fiscal dominance (monetary coordination), industrial return, and potential weak US dollar in his policy ideology. At the same time, we also remind that due to the uncertainty caused by the election results, US stocks may enter a relatively high volatility period in the July-October of each election year; and after the uncertainty of the election dissipates, US stocks and bond rates often rise, and on average, value stocks perform better than growth stocks after the election (see "Major asset classes in US election years: seeking certainty in uncertainty").

Authors: Liu Gang, Yang Xuanting, Wang Zilin

Latest developments in the election: Trump is leading in the gambling odds and key swing states

Compared to more widely reflected general national poll support rates that may have sample biases, gambling odds are often considered a more sensitive and high-frequency complementary indicator, and the importance of mastering key swing states with more electoral votes is determined by the U.S. election's 'electoral votes' system. Recently, Trump has overtaken Harris in gambling odds and key swing states, bringing more variables to the election with only three weeks left.

► Trump surpasses Harris in gambling odds. As of October 10, 2024, Harris' poll support rate of 49% still leads Trump by 2 percentage points, but PredictIt gambling data shows that Harris' lead has been narrowing since late September. Trump currently leads Harris with a 54% win rate, marking the 3rd reversal since late July.

► Trump regains lead in multiple swing states. Trump's support rates have significantly rebounded in multiple swing states, surpassing Harris again in Michigan, Pennsylvania, and Nevada, in addition to maintaining the lead in North Carolina, Georgia, and Arizona, leading in 6 out of 7 swing states. Taking Pennsylvania with the most electoral votes (19 votes) as an example, this lead is something Trump did not achieve in the 2016 and 2020 elections. With this voting scenario, Trump has secured 302 electoral votes, enough to lock in victory (270 votes to win), compared to Harris' 236 votes.

Republicans lead in the congressional election. In terms of the House of Representatives, all 435 seats in the 2024 congressional election will be up for re-election. According to RCP statistics, the seats predicted to be leading by Republicans are 207 seats vs. Democrats' 196 seats, with leads of 11 seats and 22 seats respectively. However, the gambling odds indicate a higher likelihood of the Democrats controlling the House of Representatives, remaining above 50% even after recent declines. In the Senate, out of the 100 seats in the Senate up for re-election in the 2024 election, 34 seats will be contested. RCP data shows that Republicans are predicted to lead with 50 seats vs. Democrats' 45 seats, and gambling odds also indicate a continued lead in the likelihood of Republicans winning.

Four scenarios deduced: Republican or Democratic 'sweep', Trump + Democratic House of Representatives, Harris + Republican House of Representatives.

Whether the president can obtain support from Congress, especially the House of Representatives which leads the fiscal policy, will directly affect the smooth progress of relevant policies. In this election, the uncertainty of the House of Representatives ownership is relatively high. Referring to the latest polls, we have outlined four scenarios based on the probability. According to the latest odds, the probability of Republican 'sweep' (winning the presidency and both houses of Congress) is the highest, rising rapidly from 29% to 39% since early October, widening the gap with the Democratic 'sweep' odds (18%). The scenario of Trump + Democratic House of Representatives is around 13%, while the possibility of Harris + Republican House of Representatives is relatively low, at only 5%.

► Republican Sweep (39%): Trump elected and both the Senate and the House controlled by Republicans, similar to Trump's election in 2016. This scenario is more favorable for advancing Trump's policy proposals, especially tax cuts and other fiscal policies;

► Democratic Sweep (18%): Harris elected and both the Senate and the House controlled by Democrats, similar to Obama's election in 2008. Harris's fiscal policy is likely to be promoted more smoothly in this scenario;

► Trump + Democratic House of Representatives (13%): Similar to the situation of a divided Congress after the 2018 midterm elections, incumbent President Trump confronts the Democratic Party, which leads the House of Representatives. Trump faces greater difficulties in advancing fiscal policies in this scenario, so it is not ruled out that he may use administrative measures to first advance tariff and other foreign trade policies;

► Harris + Republican House of Representatives (5%): Similar to the situation since the 2022 midterm elections, incumbent President Biden is in opposition to the Republican-led House of Representatives. It is challenging for Harris's fiscal policy to advance, the governance space is obstructed, or the continuation of Biden's policies and adjusting administrative measures will be the main focus.

Policy prospects: Infrastructure and technology have consensus, while there are differences in the industry; Fiscal policies require support from the House of Representatives; Immigration and trade depend more on the president.

Combining the policy proposals of Trump and Harris, as well as the functional differences between the two houses of Congress, the possible prospects for policies are: 1) Infrastructure and technology policies are likely to advance, but there are differences in specific industry directions; 2) Fiscal policies require support from the House of Representatives; 3) Immigration and trade policies depend more on the president's discretion.

Infrastructure Policy: Supporting infrastructure investment is a consensus of both parties, but there are slight differences in direction. In the case of a "Republican sweep," unused funds from the Inflation Reduction Act and the Bipartisan Infrastructure Act can be reallocated to the fields of "roads, bridges, and dams," and even previous legislation may be cut or repealed. However, in the scenario of a "Democratic sweep" and other presidential-congressional standoffs, the infrastructure policy will most likely continue the Bipartisan Infrastructure Act.

Industrial Policy: Both parties support the development of ai, but with different regulatory focuses; there are divergences in energy industry policy. Republicans advocate reducing regulations on ai, but may constrain the behavior of large tech companies to enhance market competition. In terms of energy policy, they may cancel the Biden administration's previously issued mandate for electric vehicles, and expedite exploration permits for oil & gas. In the scenario of a "Democratic sweep," strong regulations on ai are likely to continue, while anti-monopoly measures will be implemented from a consumer protection perspective; energy policy may further increase the development in the clean energy sector. If a scenario like "Harris + Republican House" or "Trump + Democratic House" emerges, new and traditional energy sources will be the main point of contention.

Tax Policy: The composition of the House of Representatives is crucial. Whether it is Harris's plan to increase taxes on corporations and the wealthy, or Trump's further reduction of corporate taxes, both require the support of the House of Representatives with greater influence in finance and taxation. From current polls, it is still highly probable that the Republicans will continue to control the House of Representatives, so if Trump wins, the likelihood of his fiscal and tax proposals being implemented is higher, whereas Harris would face certain constraints.

Trade Policy: Unlike investment and tax policies, the president has a large degree of autonomy in the field of trade, and Congress is unable to exert strong intervention. If Trump is elected, there is a possibility of advancing a high tariff policy, including a comprehensive 10% tariff and an additional 60% tariff on China. If Harris is elected, the status quo is likely to be maintained.

Immigration Policy: Similar to trade policy, the president has considerable autonomy in adjusting immigration policies. If Trump is elected, he may issue executive orders to tighten border policies, including but not limited to deportations. Conversely, if Harris is elected, the existing immigration policy is likely to be maintained.

Macroeconomic Implications: A "Republican sweep" maximizes both growth and inflation boost, while "Trump + Democratic House" may be the "worst" scenario.

Individually, under the Harris policy framework, the U.S. economy may more closely resemble the continuation of the situation during the Biden administration, namely a "steady" maintenance of the current path. The stimulus for incremental demand is not significant, but the "disruptive" tariffs and immigration policies on the supply side are also milder. In contrast, Trump may bring about a "big change." Massive tax cuts on the demand side stimulate U.S. economic growth, but substantial tariffs and immigration restrictions may pose inflation risks on the supply side.

Among the four scenarios: 1) A "Republican sweep" maximizes the boost to growth and inflation, but whether growth or inflation will dominate will depend on the specific policy implementation and timing. Tax reduction policies may boost GDP by 1.6% in the next 10 years, but CPI may increase by 4-7% in the next 1-2 years due to tariffs; 2) The "Trump + Democratic House" scenario may be the "worst" case, where demand stimulus is hindered, but inflation disturbances increase; 3) Under a "Democratic sweep," the drag on growth is greatest (tax increases may drag GDP by 2% over the next 10 years), but short-term healthcare and price management may help inflation fall; 4) In a scenario of "Harris + Republican House," the stimulus to demand and inflation disturbances are relatively small, and it is more about maintaining the status quo.

Asset impact: overall bullish for US stocks but unfavorable for China; the US dollar is relatively strong, gold is neutral, interest rates are rising; bulk commodities may benefit from Trump's stimulus expectations.

To judge the asset impact of the election, in addition to the differences in policies between Trump and Harris themselves, the sequence in which different policies are implemented also has a direct impact. Taking all factors into account, the probable directions are: "Republicans winning all" or better for US stocks, "Trump + Democratic Party" combination causing inflation disruption, "Democratic Party winning all" leading to tax pressure; overall upward pressure on US bond interest rates, especially under Trump's leadership; the US dollar is relatively strong, gold is neutral, uncertainties arise from administrative depreciation and safe-haven gold demand; Trump's policy stimulus may be bullish for bulk commodities despite supply constraints, long-term demand may also benefit; Trump's tariffs may hurt China's assets.

► US stocks: Perform best in the scenario of "Republicans winning all", "Democrats winning all" with the deepest profit drag, "Trump + Democratic Party in the House" causing inflation disruption, maintaining the status quo in the scenario of "Harris + Republican Party in the House". Against the backdrop of current US fiscal efforts, AI industry trends, and unaltered global fund reallocation, our long-term outlook on US stocks is not pessimistic.

► US bonds: Trump's tariff policy, tax cuts, and immigration policies lean towards inflation; under the scenario of "Republicans winning all", the passage of tax cut policies may lead to higher interest rate increases than the scenario of "Trump + Democratic Party in the House". Conversely, if Harris is elected, her policies have a lesser effect on supply-side pressure and economic stimulus, indicating smaller pressure on US bond interest rate increases compared to Trump's election.

► US dollar: If Trump is elected, most policies favor growth and inflation, supporting a stronger US dollar, but attention is needed on administrative intervention to drive competitive depreciation. If Harris is elected, policies stimulating growth and inflation are relatively low, leading to a possibly milder performance of the US dollar; under the scenario of "Harris + Republican Party in the House", the difficulty in advancing tax policies reduces the suppression on the US dollar's performance, leading to a potential slight strengthening of the dollar.

► Gold: Interest rate cuts and stimulus policies both suppress gold performance, but safe-haven demand may keep gold neutral. If Trump is elected, tariffs, a weaker dollar, geopolitical uncertainties, etc., could drive demand for safe assets, with higher hedging demand compared to Harris being elected.

► Bulk commodities: Under the scenario of "Republicans winning all", massive tax cuts or trade incentives may bring stimulus expectations, despite tariffs and increased supply constraints; under the scenario of "Trump + Democratic Party in the House", external tariff policies may be amplified in the short term, coupled with supply disturbances, potentially adding short-term downward pressure on copper and oil prices. "Democrats winning all" may suppress the emphasis on clean energy, supporting oil prices; if the Republicans control the House, the degree of game-playing in energy industry policies increases.

► Chinese assets: Referring to the experience in 2018, Trump's election brought significant tariff disturbance risks, especially under the scenario of "Trump + Democratic Party in the House". If tariffs are fully implemented, there will inevitably be short-term pressure on exports (especially in industries with high dependence), as well as an increased necessity for stimulating domestic demand.

On the contrary, if Harris is elected, although it may be difficult to loosen, the situation may not change significantly. In the first half of the year, China's exports became the main driving force for growth, contributing 13.9% of the GDP. With the US interest rate cuts underway, the interest rate-sensitive real estate sector has shown signs of improvement (such as an increase in refinancing applications, loosening of bank lending standards, and improved transactions), which will help drive the import demand for commodities related to the real estate chain. This is also the primary asset crossover point that we believe is currently changing the Sino-US cycle, but it also reduces the probability of increased domestic stimulus.

Editor/Rocky