Between now and November 2024, the biggest influence on world markets is likely to be US politics. Not Russia, not China, but the race to be the occupant of the White House from Inauguration Day in January 2025. So much else hinges on that.
After the mid-term elections in November 2022, where the Democrats retained control of the Senate, and the Republicans took control of the House of Representatives, albeit with a significantly smaller majority than they were hoping to achieve, the Republican leadership consoled themselves with the prospect of a historic clean sweep of the Presidency, House and Senate in 2024. ‘It’s disappointing we didn’t do better’, many said, ‘but at least we can pin the blame for our poor performance on Donald J Trump, which means a fresh candidate like Ron DeSantis will become our nominee in 2024, and we’ll win the Presidency.’ Variations of this theme were repeated in political salons and donor retreats across the country, and the disappointment about the results quickly passed.
Six months on from the mid-terms, the picture looks far less rosy for the Republicans, and stoicism has turned to panic, because Trump remains stubbornly popular amongst the Republican base, and he is widely tipped by pundits to become the Republican nominee. Democrats loath him. Swing voters are turned off by him. But none of the myriad of reasons presented to Republican primary voters to not support him (January 6th, the numerous lawsuits, indisputable evidence that he puts off the swing voters required to win the Presidency, to name just three), seem to resonate. He remains stubbornly ahead in the polls.
With Joe Biden having announced his intention to run for a second term in the White House (driven partly by a conviction that he alone can prevent a Trump comeback), the race for the Presidency looks set to be between the two oldest Presidential candidates in history, Biden (82) and Trump (78). And the battleground will not be the coasts (Democrat) or middle America (Republican), but the same states that were bitterly fought over in 2020 – the likes of Arizona, Georgia, Michigan, North Carolina and Wisconsin.
Eighteen months out, it is far too early to predict the outcome, or even be wholly definitive about the nominees, but the twists and turns of the race, and the outcome, will have a profound effect on world markets, because the result will greatly affect US fiscal policy, the outcome in Ukraine, and the global approach to China.
On fiscal policy, the House of Representatives has just (reluctantly) agreed to raise the US debt ceiling, but the United States is addicted to borrowing, and the Quantitative Easing necessary to sustain this will undoubtedly add to inflationary pressures. Higher interest rates will greatly affect homeowners, but will also attract more money to the US, affecting dollar exchange rates. And at the election, the Republicans will run as a more fiscally prudent, lower tax choice, even if that doesn’t come to pass once the votes are counted.
On Ukraine, Vladimir Putin is counting on Western countries becoming war weary, easing up on the supply of arms and equipment to the Ukrainians, allowing the Russians to consolidate and make advances. This is perhaps the issue where next year’s election will have the most decisive outcome. A significant chunk of the Republican base (plus many swing voters, and some Democrats too) are profoundly sceptical about becoming embroiled in Ukraine long term. Without arms and support from the US, Ukrainians would find it much more difficult to defend their country. How this issue plays out in the election will therefore have profound implications for world stability.
Finally, on China, the global consensus is moving in a pro-China direction. Relations are not as close as they were becoming in the 2010s, but the tensions which came to a head during Covid have dissipated, not just in the US, but also in the UK and (even more decisively) across the EU. This approach would continue were Biden to be re-elected, but it would most certainly change under a second Trump Presidency. And with China eying Taiwan, and possibly spotting an opportunity with Western countries tied up supporting in Ukraine, an invasion cannot be ruled out, whichever candidate wins the Presidency.
For world markets, for currency markets, and for the dollar, the coming period is unlikely to be calm. And, as we began this piece, the biggest influence on world markets is likely to be US politics.