Market Turmoil: Election Uncertainty and Fed Policy Drive Volatility

As the U.S. presidential election approaches, markets are grappling with a mix of uncertainty and jitters, driven by the potential outcomes and the Federal Reserve's policy stance. The race between Democratic Vice President Kamala Harris and Republican former President Donald Trump remains too close to call, with investors keeping a close eye on the developments.

The rising odds of a Trump presidency, along with shifting expectations of the Federal Reserve's easing policies, have left investors nervous. This has led to a surge in safe assets such as the U.S. dollar and gold. The European markets have awakened to gold setting yet another record, Treasury yields at a three-month top, and the greenback at its highest since August 2, pushing the yen near 152 per dollar.


Market expectations of Trump's trade policies, particularly tariffs, impact Treasury yields and the U.S. dollar. A Trump presidency is likely to result in higher tariffs, which could strengthen the U.S. dollar relative to other currencies. This, in turn, could lead to a rise in Treasury yields as investors demand higher compensation for taking on modestly higher default risk.

The potential for higher inflation under a Trump presidency also influences Treasury yields and the U.S. dollar. Trump's policies, including tariffs and restrictions on undocumented immigration, are likely to fan inflation, keeping interest rates higher for longer. This could lead to an increase in Treasury yields as investors anticipate higher inflation and demand higher compensation.

Market perceptions of Trump's fiscal policies, such as tax cuts, affect Treasury yields and the U.S. dollar. If the provisions of the Tax Cut & Jobs Act (TCJA) are extended, keeping tax rates lower, it could create new federal budget deficit concerns. To address these concerns, the Trump campaign has raised the possibility of additional tariffs on imported goods as a method of boosting revenue. This could further strengthen the U.S. dollar and lead to higher Treasury yields.


Market sentiments towards a potential Harris presidency differ from those of a Trump presidency, and they influence Treasury yields and the U.S. dollar. A Harris presidency is likely to result in a more dovish Fed policy, leading to lower interest rates and a weaker U.S. dollar. This could lead to a decrease in Treasury yields as investors anticipate lower inflation and demand lower compensation.

As the election nears, investors are likely to be more attuned to the potential ramifications of the election's outcome for businesses, the economy, and capital markets. The outcome's potential impact might draw greater investor focus, leading to increased volatility in the markets.