Since entering October, the U.S. presidential election situation has been evolving in turmoil towards a new direction. The once fiery 'Trump trade' in July is now showing signs of resurgence. Furthermore, current polls show Trump is clearly in the lead. The capital markets are gradually pricing in the scenario of Trump's re-election.

So, what are the current support rates for Trump and Harris? If Trump is indeed re-elected, what kind of impact will it have on the global capital markets, commodities, bond markets, especially on Hong Kong stocks and A-shares? This article interprets for you.

1. Directly hit the latest election situation

After a debate termed as 'disastrous', the Democratic Party's support rate plummeted. Coupled with the shooting incident during Trump's campaign speech in Wisconsin on July 13, the Republican Party's poll support soared, almost making Trump the 'chosen one' of the United States.

Then Biden announced his running mate, the current Vice President of the United States, Harris, as the new presidential candidate for the Democratic Party. Subsequently, the Democratic Party's support rate rose again, surpassing the Republican Party in the months of August and September.

In October, the Republican Party's Vice Presidential candidate, J.D. Vance, once considered too young and inexperienced, shone in the vice presidential debate, boosting the Republican Party's poll support rate again. Currently, according to surveys by some rating agencies, Trump is leading Harris by around 10%.

Source of information: Minsheng Securities

According to some analysts' experiences, due to the mainstream media in the USA tending towards liberal and left-leaning political positions, they may consciously or unconsciously lean towards the Democratic Party, and some Republican supporters have low levels of education and lack awareness in using the internet and modern communication tools, thus often being a neglected force in polls. Therefore, based on historical statistical patterns, the actual voting results may lean more towards the Republican Party than the poll results.

This phenomenon often results in swing states 'turning red' in past elections, but 'turning blue' in swing states is rarely seen - for example, in the 2016 presidential election, 5 states 'turned red' (Pennsylvania, North Carolina, Michigan, Wisconsin, and Florida), where the polls before the election showed more support for Hillary Clinton, but they ended up choosing Trump. However, no state 'turned blue.'

In the 2020 presidential election, due to Mr. Biden's comeback, holding the votes from the three blue wall states, only 2 states 'turned red' (North Carolina and Florida). Still, there was no case of a red state 'turning blue,' where there was no pre-election poll showing support for Trump but ended up voting for Biden.

Currently, in this election, according to data from the FiveThirtyEight website, there are 7 key swing states, where the difference in support rates between Trump and Harris is within ±2 percentage points. Trump's relative advantage in swing states has slightly increased in the last month.

Source of information: Minsheng Securities

2. Congressional elections also have a significant impact

In addition to the president himself, the party affiliation in Congress, specifically the Houses of Representatives and Senate, is relatively important. The legislative power resides in Congress, where all fiscal-related bills need to be initiated by the House of Representatives and voted on and passed by both the Senate and House of Representatives before being sent to the president for signing and enactment.

During Trump's first term, there was 'unified government in the executive and legislative branches,' leading to the passing of the extensive tax cut 2017 'TCJA Act'; however, after the 2018 mid-term elections, there was a 'divided government,' shifting the focus of governance towards tariff policies that do not require congressional votes. The probability of a 'Republican sweep' increased. The Senate is almost reserved for the Republican Party this year, while the affiliation of the House of Representatives is still uncertain, with the Democrats currently leading.

According to the data on the Polymarket website, the Republican Party is currently in a strong position in the Senate. In the House elections, the gap between the Republicans and the Democrats is narrowing, with the probability rising from 37% at the end of September to 45% in mid-October.

Source of information: Minsheng Securities

In conclusion, given that the Republican Party is currently in a strong position in the Senate, there are a total of 4 possible scenarios regarding the party affiliation for the presidential seat and House of Representatives.

(1) President: Republican Party; House of Representatives: Republican Party — Republican Party unified control

(2) President: Republican Party; House of Representatives: Democratic Party — Congress split

(3) President: Democratic Party; House of Representatives: Republican Party — Executive-legislature struggle

(4) President: Democratic Party; House of Representatives: Democratic Party — Maintain the status quo

The most likely scenario at present is (2), where there is a change in the presidency, while the Senate and the House maintain the current situation. This is also similar to the last two years of Trump's term. Shenwan Hongyuan Securities believes that scenario (2) would be mildly bullish for the US stock market, bullish for gold and copper in the commodity sector, and bearish for crude oil.

Source: Shenwan Hongyuan Securities

And due to the congressional divided between the two parties, the extent of fiscal expansion will be relatively limited, which will not provide support for US bonds. This is also the reason why the recent rebound in US Treasury yields has reversed the previous downward trend.

It is worth noting that Federal Reserve Chairman Powell is a central bank governor appointed by Trump, and his partisan affiliation belongs to the establishment faction of the Republican Party. The 50bp preemptive rate cut in September provides maneuvering space for Trump's potential monetary policy if he is re-elected. If the US economy strengthens during Trump's tenure, the Fed will not further cut interest rates, which will completely shatter the rate cut expectations and create short-term pressure on stock markets in emerging economies such as Hong Kong and A shares.

3. Positions of the Two Parties and Their Respective Influences

Regarding issues related to inflation, energy, manufacturing, taxation, immigration, as well as military and diplomacy, Trump and Harris have significantly different policy positions. The most contrasting areas are in energy, immigration, taxation, and military fields.

Source: Huaxin Securities

(1) Oil Prices

In terms of energy, Trump advocates the repeal of the Biden Electric Vehicle Act, and at the same time, easing regulations on traditional energy sources such as oil and natural gas to make the United States a major producer and strong country in oil and gas. Trump believes that global climate change is an overstated issue by 'green people'. In contrast, Harris advocates strengthening restrictions on the traditional energy industry, developing new energy, and increasing subsidies to the new energy sector. It can be seen that if Trump takes office, it will support oil prices, while Harris being in office will suppress oil prices.

(2) Immigration

Trump advocates blocking immigration, sealing the borders, and adopting a policy of repatriation for undocumented immigrants who have already entered. While Harris also agrees on border closure, her attitude towards immigration is generally supportive and strongly encourages legal immigrants to add fresh blood to the United States.

It should be noted that both Trump and Musk are descendants of immigrants from Slovenia and South Africa. If immigration were blocked, perhaps they would not have been born in the United States and naturally would not be qualified to discuss whether to make America great again.

(3) Taxation

Trump advocates tax cuts for corporations, which is a universal system, and the affected fiscal revenue is compensated by imposing high tariffs on imports. This is the logic of the so-called trade war. It is a tax system with a clear distinction between internal and external, belonging to the model of small courtyards and high walls. Harris, on the other hand, advocates taxing the wealthy, cutting taxes for the middle class and low-income earners, which is a model of redistributing wealth and does not discriminate based on nationality.

Tax policies have a significant impact on the stock market, as they directly affect the comprehensive income statement of listed companies. Trump's tax reduction policy greatly boosted the morale of the US stock market after 2016, forming a bull market that spanned 2016, 2017, and the first three quarters of 2018. If Trump is re-elected this time, it would have a great uplifting effect on the US stock market with the possibility of the market not undergoing a correction and directly initiating a bull market.

Furthermore, tax cuts for corporations are beneficial in leveraging the multiplier effect, aiding in increasing corporate profits and job creation. Conversely, cutting taxes for the middle class and low-income earners may temporarily make these individuals more financially active but in the long run, their effects are not as significant as those of corporate tax reduction.

(4) Military and Diplomacy

Trump advocates peace in military affairs and has stated that he would end the Russia-Ukraine conflict as soon as he takes office. This is a continuation of his isolationist strategy. In the previous term, Trump threatened to withdraw from NATO, withdraw from the Iran nuclear negotiations, and so on. The Democratic Party, on the other hand, advocates maintaining the status quo in these areas.

It is worth noting that American military industry enterprises generally support the Democratic Party and are not opposed to unexpected regional military conflicts occurring outside the United States, even welcoming them. Based on this logic, if Trump is elected, it will exert certain pressure on the American military industry. However, in the current situation of escalating conflicts around the world, it may not be so easy to quickly stop the fighting.

The detailed policy proposals of the two parties are summarized in the table below.

4. Impact on the Chinese Stock Market

As for the impact of Trump's election on the Chinese stock market. The author believes that it can be analyzed from two perspectives: short-term and medium-term.

In the short term, Trump's election supports the US Treasury yields, and therefore provides significant support to the US Dollar. This, in turn, effectively limits the room for maneuverability in China's recent currency policy, putting pressure on the liquidity and valuation of Hong Kong and A-share markets that have just opened up.

This was the huge pressure on the Hong Kong and A-share markets in early 2017 when Trump took office, accompanied by four interest rate hikes by the Fed that year. Although there was a sector rotation and a bull market in leading stocks at that time, both the gem and new economy sectors represented by the Chinext Price Index fell into decline.

However, in the medium to long term, Trump's long-term vision is to restore the prosperity of the American economy in the style of the 1980s and 1990s. In the current era of economic globalization, the American economy cannot truly decouple from China. Trump's business nature also means that when profits are sufficient, he will not completely turn against China, which will help drive the recovery of the Chinese economy in the medium to long term.

This is since the end of the Fed's interest rate hikes in 2019, entering an era of interest rate stability, and the reopening of China's monetary policy space. The two-and-a-half-year bull market from 2019 to the first half of 2021, especially led by the Chinext Price Index.

If Trump is re-elected this time, Trump's trade will make a comeback, and the impact on A-shares will be similar, initially low and then high.

The market's common concern about trade disputes with China, if we observe Trump's performance in the previous term, we can roughly observe a pattern: the market often experiences declines in the short term after announcements, but soon reverses, showing signs of recovery; however, after the tariff policy is formally implemented, the Chinese stock market often shows a downward trend.

After Trump took office in 2017, he announced a series of trade policies targeting China, but most of these policies remained in the investigation stage. For example, on April 20, the U.S. government announced an investigation of steel imports from China, which led to significant market volatility. However, by August 2017, despite the continued uncertainty in trade policies, the market showed a trend of sustained growth, with relatively minor reactions to trade policies.

From 2017 to 2019, when the U.S. government announced but did not implement relevant policies on imported products from China, the market initially experienced a sharp decline followed by a slow recovery. Looking at the market performance in the 60 trading days before and after the formal implementation of tariff policies, in List1, List2, and List3 tariffs, due to the high tariffs imposed (reaching 25%) and wide-ranging impact (the two tariff increases covered $250 billion worth of imported products), the market showed a significant downward trend in the 60 working days after the policy implementation, with significant volatility.

In the fourth round of tariff policies, the United States only imposed tariffs on a portion of the $300 billion worth of imported goods (approximately $120 billion) at a relatively low tariff rate (15%), lower than market expectations, resulting in a relatively good market performance.

5. Summary

Of course, the above analysis is only a prediction based on historical experience, logical deduction, and the current market trends, and should not be considered definitive. As the election approaches, anything can happen, sudden changes in swing states, and the potential 'defection' of traditionally blue or red states are all possibilities.

Just like in the 2016 election, when everyone thought Hillary was a sure win, Trump unexpectedly prevailed. Similarly, in 2020, the Democratic Party, with almost no chance of winning, unexpectedly reclaimed the three states in the blue wall that were originally in Trump's favor, ultimately turning the tables.

Moreover, based on historical experience, the true market trends often only emerge one week after the election results are out, through market dynamics. Currently, investors should not overly speculate, in case sudden changes in the situation make it difficult to recover.

Editor/rice