Events around US President Donald Trump’s positive coronavirus test unfolded suddenly at the end of last week and developed quite rapidly, with markets caught off guard by the news.
Understandably, equity markets around the world lost ground on Friday, but only modestly as the impression was initially given that President Trump’s symptoms were mild. Bond and gold markets were underpinned but oil prices fell sharply and the dollar was relatively stable.
Only after markets closed on Friday was it announced that President Trump had been hospitalised, raising questions about the transparency of the White House and increasing the likelihood that market pressures will persist, especially now that the election is less than one month away.
Following weak equity market performances in September, October was already shaping up to be another turbulent month with markets balancing mixed economic data, the absence of a Covid-19 vaccine breakthrough, no news on a pending US fiscal stimulus and ongoing US-China tensions. On top of all this, the election on November 3 was coming into sharper focus following the chaotic first presidential debate last week, which deepened concerns about the possible outcome.
Obviously, the positive test for President Trump introduces a new element of uncertainty into the mix, especially now that markets know that he is in hospital.
The usual focus on the monthly jobs report was understandably overlooked, with the data showing a smaller-than-expected gain of 661,000 in non-farm payrolls in September, but with revisions making up for the shortfall and with the unemployment rate declining to 7.9 per cent from 8.4 per cent.
Even comments from House Speaker Nancy Pelosi indicating that she was working with Treasury Secretary Steven Mnuchin on a fiscal deal failed to get as much reaction as would normally be the case given the uncertainty about President Trump.
The opinion polls before the latest news already strongly favoured the Democrats, with financial markets concerned about possible changes in tax policy and regulatory policy that could follow a Joe Biden victory, which might be viewed as market-unfriendly. The initial reaction of the markets to President Trump's Covid-19 diagnosis indeed reflected a sense that a Democrat victory could now be more likely, with the drop in the oil price in particular a function of the growing awareness of Mr Biden’s more negative position on the oil sector.
Traditionally, electorates might be expected to rally around a hospitalised President, but while there is undoubtedly sympathy for President Trump, the electorate is more polarised than ever before and this news may be more prone to reinforce divisions, rather than unify the country.
But, there are still a number of other possible outcomes that could yet come into play in the election. One of them is that President Trump simply makes a swift recovery, which could support his position that he is physically stronger than Mr Biden and actually help his election campaign recover.
At the other extreme is the possibility that the President becomes incapacitated. In such a scenario, Vice-President Mike Pence would likely be sworn in and then there could be pressure to postpone the election, something that has never happened before.
Congress would be the arbiter of such matters, but clearly the possibility of a delay could yet work in President Trump’s favour, especially as such a possibility has been something he has previously mooted. Furthermore, if any sudden national security issue were to arise during this period, forcing Congress to come together, this could also be seen as strengthening the position of the incumbent.
Other scenarios that might have to be considered include the possibility of President Trump standing down should his health deteriorate so much and the Republican Party having to choose another candidate, and someone who might have a better chance of beating Mr Biden.
Financial markets will likely have to weigh up the possibility of all these potential outcomes in the coming days, all of which are likely to keep them very much on edge, especially as they await every health bulletin. Investors were already looking at the likelihood of a very turbulent month ahead before the President succumbed to Covid-19, but the outlook has just become a lot more unclear and first reactions may yet turn out to be wrong.
Tim Fox is a prominent regional economist and financial market analyst
