Biden drops out of the US Presidential election race - are the markets remaining calm before a potential storm?

No knee-jerk reaction to Biden's decision

The withdrawal of President Joe Biden from the US presidential election race has, so far, been taken relatively calmly by the markets and prompted only a small shift in political betting. With the general assumption being that current Vice President Kamala Harris will be anointed as the new Democratic party nominee, the implied probability of Donald Trump winning the election has fallen from around 65% before Biden’s announcement to approximately 62.5% now, a move which shows he is still widely expected to triumph and which shows the mountain that Harris – or whoever ultimately replaces Biden – will have to climb if they are going to persuade a majority of Americans to vote for them.

Trump's lead had been growing

Recent opinion polls had shown Trump’s lead over Biden growing, especially after the attempt on his life on 13th July. In hindsight it was probably this event that finally moved Biden’s exit from the race as being something seemingly unimaginable as recently as last month, to becoming a virtual certainty in the run-up to his announcement at the weekend. But even though many of his peers in the Democratic party will welcome his decision to step down, it has left a vacuum of uncertainty, with no guarantees that his withdrawal will be enough to ensure the Democrats maintain hold of the White House in November. As such, although Biden will be lauded as having ‘done the right thing’, the fact that he has left it so late in the day will be criticised, as he has denied his successor the opportunity of campaigning in the US Primaries, very much seen as an opportunity for presidential candidates to test their mettle as a potential President and allow the US electorate to form a judgement on them.

Markets so far relatively relaxed

So far, the markets have expressed a relatively sanguine attitude towards the weekend’s developments. With a Trump presidency largely anticipated to be more fiscally expansionist, inflationary, and supportive of the Usd, than a Biden one would be, the impact in US markets has so far been surprisingly muted. The DXY index is currently trading around the level where it closed on Friday, while US 10-yr Treasury yields are down only by around 2bps. Even the more politically sensitive 2-yr yield curve has risen by just 0.5bps, while Bitcoin, expected to be strongly supported and given enhanced respectability under a Trump Presidency, is only down by just under 1%. With the markets having been previously wagering on Trump’s return to the White House by trimming holdings of US bonds and buying products such as Bitcoin, the muted reaction being seen so far suggests that a Trump victory is still very much viewed as the most likely outcome, regardless of what actions the Democratic party now takes.

But is this just the calm before the storm?

Indeed, this response may actually be the most sensible course of action, given the immediate economic data the markets are facing. Investors will already have been focusing on the major earnings data to be released this week, with both Tesla Inc. and Alphabet Inc. the first of the ‘Magnificent Seven’ to report on Tuesday. And from a macroeconomic perspective, next week we have the July FOMC meeting where, even though interest rates are widely expected to remain unchanged, it is a decision that could yet be influenced by the release of the Q2 GDP figures on Thursday and the all-important PCE Price Index numbers on Friday. The markets appear to have taken a ‘wait and see’ approach to developments before deciding whether or not any material action is required, and in that respect it may well be the results of the first opinion poll to be released once Biden’s successor has been officially chosen that generates any reaction. As such, we may well be experiencing the calm ahead of a potential storm.