How US policy could impact global markets

According to Azhar Hussain, global head of credit at Royal London Asset Management, the US has been the “most effective” economy in its leverage of coordinated fiscal and monetary policy to regenerate its economy.

“This has had a huge positive indirect impact on global markets over the last year,” he said.

“As we see a reversal of these policies the global economy is likely to suffer with lower growth. As China and Europe are mired in their own stresses over debt funded growth these will be compounded by the US unwinding its fiscal and monetary supports.”

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Hussain argued that this would be particularly harder on weaker emerging markets as “a stronger dollar and higher rates start to bite”.

“Within fixed income markets, higher-yielding assets with shorter durations will be needed to insulate from the unwinds ahead,” he added.

Sandra Ebner, senior economist at Union Investment, highlighted that the country’s long-term growth potential, driven by Biden’s infrastructure spending plans, could lead to higher corporate spending and higher interest rates in the US market, supporting the European economy.

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“A lot of that expectation is already being priced in,” she said. “The most likely impact for global markets could be US-China relations, since there is bipartisan support for getting tough on China.

“This poses some risks regarding supply chains and a tit-for-tat that could bring some market volatility.”

She added: “The re-election risk of former president Donald Trump in 2024 is still too far away to be of concern for markets.”

David Riley, chief investment strategist at BlueBay Asset Management, said: “Global markets have become accustomed to US political uncertainty, with the Republicans likely to gain control of Congress after the mid-term elections.”

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He added: “The leadership and policy decisions of the Fed will determine the path for US growth and inflation with global spillovers.”

Meanwhile, RBC Global Asset Management’s chief economist Eric Lascelles argued: “Going forward, the window for significant policy action is shrinking. Recent gubernatorial and mayoral elections suggest Democrat support is waning, and historically the incumbent party loses ground in the mid-term elections that are now just a year away.

“For Biden, this would be a devastating development as it would hand the Senate back to the Republican Party and arrest any further legislative progress.”

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