• MUFG forecasts based on current polling currently assume a Biden victory, but a reduced lead in key swing states casting shadow over predictions
  • Two distinct outcomes for global oil markets depending on the winner: a stark contrast in the way Biden would approach oil markets in comparison to an extended Trump presidency

An MUFG roundtable held yesterday pointed to a U.S. election with higher than usual uncertainty, signalling extreme market volatility.

Despite Joe Biden taking a clear lead in the polls, his lead in key swing states is less than that of Hilary Clinton's leading up to the 2016 election, suggesting increased market nervousness. However, this isn't the main concern for the markets – it is the events which could follow the November 3 election.

Derek Halpenny, Head of Research for Global Markets EMEA and International Securities commented:

"The markets could get very volatile. The big issue is if this election becomes contested due to postal voting, leading to a vacuum of power for weeks after the election, which makes investors very nervous.

"Determining the winner could take days, if not weeks, leading to concerns and increased appetite for hedging risk for the period after the election. Plenty of risks lie ahead."

For the dollar generally, MUFG have bearish view, based on the assumption of a Biden victory, substantial fiscal stimulus, and a Federal Reserve commitment to keeping nominal yields lower. Based on the S&P correcting from the record high in September and the strengthening of USD over September, prospects for USD remain good for the next four to five weeks, or longer - should there be a contested election.

The outcome of the election will have profound impacts for not only the FX markets, but also for the oil and gas markets.

Ehsan Khoman, Head of MENA Research and Strategy at MUFG explained at the event:

"A second term for President Trump suggests a continuation of the status quo; a U.S. 'energy dominance' policy.

"A Biden win, on the other hand, points to a spectrum of policies in carbon and drilling taxation changes that could become significant disruptions – both positive and negative – for the energy sector."

Joe Biden is expected to take a more middle ground approach than his counterpart, anchored between a reengagement in U.S. global leadership toward sustainable energy targets, weighed against U.S. energy dominance policy strategy. Such a middle ground approach could see a reversal of much of the deregulation that has occurred and thus materially impacting global energy markets.

The Trump “energy dominance" status quo is likely to mean a continued surge in production of oil and gas, driving higher exports of crude oil, refined products, NGLs, LNG, and petrochemical products. This will keep global prices relatively low, and the recent hands-on approach to oil market management will continue putting geopolitical pressure on OPEC+ producers to cut production should prices fall too low – to support the U.S. oil sector - but also potentially pressuring OPEC+ to raise production should prices move too high – to support U.S. consumers.

On the other hand, a Biden administration could see tight regulations drive some magnitude of a slowdown for U.S. hydrocarbon production and export growth, with likely job, trade and economic impacts in varying scale and scope, leading to higher global oil prices in the medium-term, and inevitably emboldening OPEC+ producers.