Opinion

Election Impact Muted on Markets, Focus on Rates

By Athena Xu

7/10, 09:41 EDT
GOLD
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Market Shrugs Off Election Jitters

Political Noise Fails to Move Markets

As the U.S. presidential election looms, one might expect financial markets to react to the shifting political landscape. However, recent data suggests that the market is largely indifferent to the electoral fortunes of the candidates. Despite the high stakes, the S&P 500, the U.S. dollar, crude oil, and gold prices show minimal sensitivity to the daily changes in the PredictIt betting odds for Donald Trump, Joe Biden, and a potential "other Democratic" candidate.

  • S&P 500 Analysis: The coefficients for Trump and Biden are 0.0004 and -0.0003, respectively, with t-statistics of 0.78 and -0.50, indicating an insignificant impact on the S&P 500. Even the "other Democratic" candidate shows a coefficient of 0.0000, further emphasizing the market's indifference.
  • Dollar Dynamics: The U.S. dollar index (DXY) also shows negligible sensitivity to the candidates. Trump's coefficient is -0.0002, Biden's is -0.0003, and the "other Democratic" candidate's is -0.0005, all with t-statistics below 2.0, suggesting no significant impact.
  • Commodity Prices: Crude oil and gold prices similarly exhibit minimal reaction to political developments. For crude oil, Trump's coefficient is -0.0002, Biden's is -0.0010, and the "other Democratic" candidate's is -0.0005. Gold shows coefficients of 0.0004 for Trump, 0.0005 for Biden, and 0.0009 for the "other Democratic" candidate, all statistically insignificant.

Interest Rates and Economic Indicators Take Center Stage

While political developments seem to be on the backburner, interest rates and economic indicators are driving market movements. The 10-year Treasury yield, in particular, shows a strong correlation with asset prices.

  • S&P 500 and 10-Year Yield: The coefficient for the 10-year yield is -0.0276 with a t-statistic of -2.76 for the entire year, and -0.0376 with a t-statistic of -3.41 since May, indicating a significant inverse relationship.
  • Dollar and 10-Year Yield: The DXY's coefficient for the 10-year yield is 0.0290 with a t-statistic of 7.00 for the year, and 0.0310 with a t-statistic of 5.01 since May, showing a strong positive correlation.
  • Commodities and 10-Year Yield: Crude oil's coefficient for the 10-year yield is 0.0470 with a t-statistic of 2.70 for the year, and 0.0607 with a t-statistic of 2.02 since May. Gold's coefficient is -0.0410 with a t-statistic of -2.91 for the year, and -0.0732 with a t-statistic of -2.82 since May, indicating significant relationships.

A Thought

As the election approaches, the market's focus remains on economic fundamentals rather than political noise. This could change as we get closer to November, but for now, interest rates and economic indicators are the primary drivers. Investors should keep an eye on these factors, as they are likely to continue dictating market movements in the near term.