Paul O’Connor, Head of Multi-Asset at Janus Henderson Investors considers the various market impacts of President Trump’s diagnosis

While the news that President Trump has contracted COVID-19 has added further confusion to the US election race, financial markets, polls and betting odds continue to shift towards a Democrat clean sweep in the US election. There are still questions to be answered about what happens if the president’s health deteriorates further but for now, markets are more focused on the outlook for fiscal stimulus, before and after election day.

Naturally enough, the initial response of financial markets to Friday’s announcement was to sell risk, but sentiment recovered later in the US trading session and the positive tone has continued into Asian and European trading today. While, some commentators are interpreting the recovery in investor sentiment as reflecting increased optimism on the president’s health, we think it is more about investors increasingly pricing in a Democrat clean sweep in November’s election. Although it was only a one day move, Friday’s sharp US equity market rotation from growth into value bore all the hallmarks of the blue wave trade.

Both the polls and the betting markets continue to point towards a broad electoral victory for the Democrats. Before last week’s TV presidential debate, Donald Trump was trailing Joe Biden by 7-8 points in the polls and was behind in most of the key swing states. Three national polls taken since the TV debate show Biden’s lead at 14%, 10% and 7%. The fact that Donald Trump’s illness will probably take him off the campaign trail for a couple of weeks, doesn’t augur well for his team’s chances of reviving his electoral support.

Betting markets continue to point to an 80-90% probability that the Democrats will retain control of the House of Representatives. Expectations for the Senate have been more volatile. The notable action here has been the swing from this being seen as a 50-50 tussle, just a month ago, to today’s implied probabilities of 2/3 v 1/3 in favour of the Democrats. If polls and the betting markets are taken at face value, Joe Biden will be leading his party to a clean sweep in November.

Another potential interpretation for today’s recovery in risk assets is that investors believe that the president’s illness will improve the likelihood of compromise being reached on the contentious US fiscal stimulus package. Some might take encouragement from Donald Trump’s weekend tweet urging negotiators to “work together” on this. However, the big divide here is not between the Democrats and the president, but between the Democrats and congressional Republicans. A decisive breakthrough before the November election would be a surprise to us and a positive surprise for investor risk sentiment.

The president’s illness has unsurprisingly brought some focus onto questions regarding scenarios in which his health was to deteriorate further. Given that COVID-19 is a two-phase infection for many patients, often worsening in the second week, these questions will persist until Mr Trump is clearly on a recovery path. In broad terms, the US Constitution would specify that the presidential authority should be transferred to the vice president if the president was incapable of performing his official duties. If the president was so ill that he had to withdraw from the election, then a delayed election is possible but by no means inevitable. No presidential election has ever been delayed – not even during the World Wars. If polling day was delayed, the new election would have to occur before January 20, the day when Donald Trump’s term in office is scheduled to end.