US Presidential Election, Crown | The election result that can...

Harald Magnus Andreassen, chief economist at SpareBank 1 Markets, recently told Nettavisen that the nightmare scenario for the stock market in the US presidential election is that Joe Biden wins, and Donald Trump refuses to resign.

Such a confusing situation can lead to a clear fall in the stock market. Then the Norwegian krone can also be affected.

– The US stock market is the most relevant for the krone. In September, we had a fall in the American stock markets of 10 percent, and in that period the krone fell by 60 øre against the euro and by 90 øre against the dollar.

– Should we have a 10 percent fall in the stock market after the presidential election, the krone could weaken by 60-90 øre. Then the krone can again be traded at over 10 against the dollar, says chief economist Kjetil Olsen in Nordea Markets to Nettavisen Økonomi. Today, in the professional foreign exchange market, you have to pay just over NOK 9.20 for a dollar (see the graph below).

Also read: Trump vs. Biden: Norwegian expert points out the night wins

Affects the most

Olsen is thus in line with DNB Markets. The online newspaper wrote barely two months ago that fluctuations in the American stock market are what – perhaps somewhat surprisingly – affect the Norwegian krone the most.

There may therefore be major changes in the krone in connection with the presidential election in just over a week.

– The most important reason is the strong connection we have almost mechanically observed between fluctuations in the stock market and the presidential election, Olsen says.

Nordea has watched historical episodes surrounding the elections. The typical thing is that only the election is over and a winner has been chosen, the uncertainty disappears. Then the stock markets tend to rise, not much, but a little.

A winner is most important

– The point is that it is more important that there is a winner, and it will be able to pull the crown in a slightly stronger direction. If there is uncertainty about who will win and Trump does not acknowledge the result, there is a great danger that the stock market will interpret this very negatively.

– Then it can be a pretty useful fall. The last time there was uncertainty about the outcome, in 2000, the stock market fell 10 percent in one month, says the chief economist.

– Will there be greater fluctuations Trump wins than if Biden wins?

– It seems that the stock market is positioning itself for Biden’s victory, it will be a big surprise if Trump wins, but how it will turn out in this case is uncertain.

Better with collaboration

– Who do you think Norway should hope for, financially?

– Norway is a small open economy, and we are supporters of international cooperation and international organizations. Over time, it is better to have a president who is more cooperative, it is to the great advantage of the Norwegian economy, Olsen answers.

He says that the relationship with the EU is what separates the two presidential candidates the most, and here Biden is much more in favor of playing on a team. In general, there will be more predictability and order if he wins.

An important reason for the strong connection between the krone and the US stock market is the life companies’ investments. The Norwegian life insurance companies have large US equity investments, which they hedge against currency fluctuations. When the life insurance companies bought these shares, they bought kroner and sold dollars.

Also read: Here, Trump has a crushing leadership

Selling kroner

But when the foreign equity investments fall in value, these investments are insured. The life insurance companies will then sell Norwegian kroner and buy back dollars. Large krone sales can weaken the krone, and in uncertain times there is an escape to safe havens. We saw this during the sharp depreciation of the krone in March.

– Yes, then there was significant net krone sales, 30 billion kroner in a climate that was very little krone-friendly, and these were forced sales. The krone completely lost its footing, and we are convinced that this mechanism is extremely important, says the chief economist.

In the past, banks took more of this currency shock and were a filter for life companies. But after the financial crisis just over ten years ago, banks have become more regulated and take less risk, including currency risk.

Very sensitive

Interest rate and currency analyst Ingvild Borgen Gjerde in DNB Markets has no doubt that the US presidential election is very important for the Norwegian krone. She says the krone is very sensitive to movements in international financial markets in general, and the US stock market in particular.

– The outcome of the US presidential election will probably affect these markets. If the stock markets and risk appetite rise, the krone will strengthen. Should the stock markets and risk appetite fall, the krone will weaken, says Borgen Gjerde to Nettavisen.

– If Trump loses the election and refuses to step down, what do you think will happen to the dollar and the krone?

– It will be controversial and a situation we have not been in before, and it will create a lot of uncertainty. High uncertainty is usually something that causes the risk appetite of investors to fall, Borgen Gjerde answers.

– This means that they apply for so-called “safe havens”, at the same time as they sell risky assets and currencies. I think that will mean a stronger dollar and a weaker krone, she continues.

The Senate decides

– Does it matter who wins of the two if there is no dispute about the election outcome?

– Yes, it does matter, but the election to the Senate will be decisive for how much it will have to say. If Biden wins without the Democrats taking over the Senate, he will have limited opportunity to implement his policy.

– Thus, neither the significance for economic policy nor the markets will be so great, Borgen Gjerde answers.

She says Biden provides increased predictability. There is less use of Twitter in diplomacy and negotiations, and Biden is generally a more traditional type of leader.

– These are all factors that mean that the uncertainty and fluctuations in the markets will be less with Biden, and that is positive, says the DNB analyst.

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The double

The biggest effect will come if Biden wins, and the Democrats also take control of the Senate.

– Then Biden will have a greater opportunity to implement his policy. Here we believe the attention to more stimuli via the budgets will come first. This will probably be positive for the willingness to take risks in the markets, in that equities and interest rates will rise further and the Norwegian krone may strengthen.

But, in the longer term, Borgen Gjerde believes that Biden can switch to a less market-friendly policy. There may be increased corporation tax and possibly also stricter regulation of the large technology companies.

“All other things being equal, this will probably be negative for US stock markets,” she says.

The outcome of the presidential election could also affect interest rates. Long-term US interest rates have begun to rise. This may be because the market is now pretty sure that Biden will win. Biden has said he wants to increase public spending.

Stimulates the economy

– There may be an explanation, but a Biden victory and a new, large stimulus package is far from certain, Borgen Gjerde nuances.

– Another possible explanation may be that the uncertainty surrounding the election means that many reduce investments that can be greatly affected by the election outcome, she continues. Bonds are an example here.

According to the DNB analyst, long-term US government bonds can be greatly affected by the election result. The rise in these interest rates may be due to investors selling government bonds.

When investors want to sell bonds, it puts pressure on interest rates upwards, while interest rates fall when many want to buy. And Norwegian long-term interest rates usually follow developments in long-term interest rates in the US and Europe very closely.

Higher fixed interest rates?

The presidential election on 3 November may thus have an impact on what Norwegian bank customers have to pay for new fixed-rate loans. Long-term Norwegian interest rates have risen somewhat since 16 October.

That said, there are some special conditions that drive US interest rates during the day. There is both uncertainty ahead of the presidential election and the US Federal Reserve’s purchases of government bonds.

– Therefore, it is not the case that Norwegian interest rates follow the American interest rates one by one. But with large movements in US interest rates, Norwegian interest rates will probably follow in the same direction, says Borgen Gjerde.