How did the first debate of the U.S. election affect market expectations?

(The author of this article is Yang Fan, Chief Analyst of Policy and Macro at CITIC Securities)

At the end of the first debate of the U.S. election, Biden's on-site performance was less than expected, and in a state of high political polarization, the two sides launched fierce attacks and defenses around economic, social and diplomatic issues, but the overall incremental information was limited. In terms of expected impact, although the success or failure of a single debate is not enough to completely determine the final outcome, the expectation of "Trump's return" may continue to ferment. In terms of export impact, since the Biden administration's tariffs were imposed in May, foreign trade enterprises have shown certain signs of "rushing for exports", and it is necessary to pay attention to the new round of "rush for exports" around the "return of Trump", and it is expected that China's total exports will increase by about 4% this year. In terms of China-US relations, although the US election has entered a "white-hot" stage, and the disruption of geopolitical risks to the market still needs time to be digested, China-US relations will still operate under the main line of "competition without conflict" during the year.

▍In terms of debate, Biden's on-site performance was less than expected, although the success or failure of a single debate is not enough to completely affect the final result, but the expectation of "Trump's return" may continue to ferment.

(1) On the evening of June 27, local time in the United States, U.S. President Joe Biden and former President Trump held the first televised debate of the presidential election.

(2) From the perspective of the two men's debate strategies, Biden tried to focus on his achievements in office, demonstrate a stable and mature policy style, highlight Trump's extremist tendencies, and especially try to respond to questions about his health and replicate the success of this year's State of the Union address. Trump, on the other hand, has tried to attack issues such as inflation during Biden's presidency and questioned Biden's leadership, especially in an attempt to alleviate concerns among some voters about his extremist tendencies.

(3) Judging from the on-site performance, Biden's debate strategy did not go smoothly, but further deepened the outside world's concerns about his health. Trump, on the other hand, deviated from the facts in many of his arguments, but on the whole showed a better debate. Judging by the reports of CNBC and other media after the debate, the gap between Biden's real-time polls and Trump's has widened further.

(4) In terms of expected impact, although the success or failure of a single debate is not enough to completely determine the final outcome based on historical experience, the expectation of "Trump's return" may continue to ferment. Although Biden said afterwards that he was still committed to defeating Trump, the discussion of the "Democratic Party's replacement of candidates" has been unfolding within the Democratic Party and in the media. Theoretically, the bipartisan party convention in the United States has not yet been held, and the two have not yet formally won the party nomination in the process, but at this time, the replacement candidates still face the risk of insufficient preparation, and it is necessary to pay attention to the subsequent developments.

▍In terms of policy propositions, in a state of high political polarization, the two sides have launched fierce attacks and defenses around economic, social and diplomatic issues, but the overall incremental information is limited.

(1) Objectively, short televised debates focus more on live effects than on policy details. In particular, when both of them have been in power and the political spectrum is highly polarized, it is difficult for candidates to give policy propositions that exceed expectations at the debate scene.

(2) In terms of economic and industrial policy, the debate focused on fiscal and "re-industrialization" in the United States. In terms of fiscal policy, Biden emphasized raising social security and raising taxes for high-income groups, which tends to stimulate demand; Trump, on the other hand, emphasized the positive impact of the tax cuts and favored improved supply. In terms of industrial policy, both candidates emphasized the "re-industrialization" strategy of the United States, focusing on manufacturing and infrastructure. However, there are some differences in focus, such as the Democrats' focus on public transportation infrastructure, while the Republicans' focus is more on the power grid, energy transmission, and cybersecurity, and the two sides have essentially different views on climate and energy policy. Overall, there is limited incremental information on economic and industrial policies in this election debate, and the two candidates continue to follow the main tone of their previous policies, emphasizing their achievements during their respective terms.

(3) In terms of social issues, they are also the focus of this debate, such as abortion rights, gun control, immigration, and minority rights. Biden's social policy advocacy includes supporting abortion rights, supporting gun control, promoting racial equality, opposing the death penalty and open immigration policies, etc.; Trump is relatively anti-immigrant but has reservations on abortion rights. Biden called the overturning of Roe v Wade "a terrible thing" and Trump praised the justices who supported the repeal of Roe v Wade and said abortion legislation should be left to the discretion of state governments. It will be interesting to see whether the Democratic Party can repeat the unexpected midterm elections in 2022 through the issue of abortion rights.

(4) On diplomatic issues, the two sides engaged in fierce exchanges on issues such as the Russia-Ukraine conflict, military aid to Ukraine, NATO unity, the Palestinian-Israeli conflict, policy toward Israel, the withdrawal of troops from Afghanistan, and tariffs on China. Trump questioned Biden on trade deficits and fentanyl, while Biden said that he "reduced the U.S. deficit with China to the lowest level since 2010" during his tenure.

▍In terms of policy style, Trump's recent statements on sensitive issues have been recycled, and the core members of the former Trump team are also explaining MAGA physically, physically, and chemically, and they can pay attention to Trump's vice presidential candidate in the future.

(1) Judging from Trump's recent policy propositions, he deliberately downplays the extreme, which may be a campaign strategy when he is leading in the polls. On immigration, for example, Trump said on June 20 that foreign students who graduated from U.S. universities should be allowed to obtain green cards; On the issue of abortion rights, Trump has also deliberately avoided extreme expressions.

(2) Many former core members of Trump's team are also interpreting MAGA physically, incorporating many policy propositions into the traditional political framework of the United States, further diluting the extreme color. Former Trade Representative Robert Lighthizer, for example, published the book "No Trade Is Free: Changing Course, Taking on China, and Helping America's Workers." In the book, Lighthizer combines the launch of tariffs on China with "progressive goals" such as protecting American jobs and tackling climate change, in an attempt to justify Trump's China policy within the traditional political framework.

(3) On the issue of the vice presidential candidate, although Trump claimed that he had confirmed the candidate, he did not officially announce it. Synthesizing reports from CNBC and other media outlets, such as North Dakota Gov. Doug Burgum, Ohio Sen. James David Vance. Vance) and Senator Marco Rubio of Florida may be potential candidates. They are all supporters of Trump's MAGA proposition, and their positions on economic, diplomatic, and social issues are basically the same as Trump's.

▍In terms of congressional elections, some state primaries have begun recently, but the uncertainty of congressional elections is higher than that of presidential elections, and it may be necessary to observe them in the near future.

In terms of electoral arrangements, all 435 seats in the U.S. House of Representatives and 33 seats in the Senate will be held on November 5, 2024. Several states, including Colorado, New York, and Utah, have opened primaries to determine each party's candidate in congressional elections. According to Race to the WH's projections as of June 27, 2024, in the House of Representatives, the Democrats are expected to win 219.2 seats, the Republicans are expected to win 215.8 seats, and in the Senate, the Democrats are expected to win 48.1 seats, and the Republicans are expected to win 51.9 seats. However, given that congressional elections are more fragmented, with fewer samples, and more difficult to predict, the question of the ownership of the two houses may need to be re-observed.

▍In terms of export impact, since the Biden administration's tariffs landed in May, foreign trade enterprises have shown certain signs of "rushing for exports", and it is necessary to pay attention to a new round of "rushing for exports" around the "return of Trump", and it is expected that China's total exports will increase by about 4.0% this year.

(1) Looking back at history, in March 2018, then-US President Donald Trump signed a presidential memorandum to plan to impose large-scale tariffs on goods imported from China based on the results of the "Section 301 investigation". In July and August 2018, the United States imposed 25% tariffs on $50 billion of imports from China in two batches. In September 2018, the U.S. announced a 10% tariff on $200 billion of Chinese imports to the U.S., and announced that it would raise the tariff to 25% in January 2019. From the first quarter to the third quarter of 2018, China's exports to the United States achieved rapid growth of 13.6%, 11.3% and 12.9% respectively under the effect of "rushing to export", and the drag effect of tariffs in the fourth quarter has been reflected, and the growth rate of exports to the United States has fallen to 6.3%. For the whole of 2019, China's exports to the United States fell by 12.5% year-on-year, down 23.8 percentage points from 2018. In terms of industries, the export of light industry manufacturing (leather and feather manufacturing, furniture manufacturing, food manufacturing, papermaking) and mechanical and electrical products (mechanical and electrical audio and video equipment, optical medical instruments, vehicle transportation equipment manufacturing) is greatly affected by tariffs, and the growth rate of exports to the United States will decline more in 2019.

(2) Focusing on the current situation, in May 2024, the US released the results of the four-year review of the additional Section 301 tariffs on China, announcing that it would further increase tariffs on electric vehicles, lithium batteries, photovoltaic cells, critical minerals, semiconductors, steel and aluminum, port cranes, personal protective equipment and other products imported from China on the basis of the original Section 301 tariffs on China. Since May, the year-on-year readings of China's export container freight index for the US East and West US routes have maintained a rapid increase, pointing to the fact that foreign trade enterprises may have a certain "rush to export" behavior.

(3) Looking ahead, the expectation of "Trump's return" after this debate may continue to ferment in foreign trade enterprises, which may make foreign trade enterprises more worried about Trump's comprehensive tariff threat, so they will start to increase their rush to stock up in overseas markets in the third quarter. As far as exports are concerned, we believe that the current major overseas economies have gradually started the replenishment cycle, the "Belt and Road" economies' dependence on mainland imports is still rising, and the "rush to export" of foreign trade enterprises will jointly support the recovery of the export trend during the year, and China's total exports are expected to increase by about 4% this year.

In terms of China-US relations, although the US election has entered a "white-hot" stage, and it will still take time to digest the disruption of geopolitical risks to the market, China-US relations will still operate under the main line of "competition without conflict" during the year.

(1) In the short term, the "new period of turbulence and change" will begin to be reflected in a series of election activities in 2024, and the U.S. election will become the main line affecting the global situation in the second half of the year, and the disruption of geopolitical risks to the market will still take time to digest. We expect that although the U.S. election has entered a "white-hot" stage, China-US relations will continue to operate under the main line of "competition rather than conflict" during the year, with controllable substantive impact and emotional disturbance. On the one hand, China policy may become one of the important contents of the hype of candidates from both parties in the United States, and it is necessary to show a "tough" posture and win the support of voters, especially in debates and rallies, when the candidates' China-related policy remarks may attract market attention. On the other hand, in the context of the continuation of the Russia-Ukraine conflict and the unclear Palestinian-Israeli conflict, the Biden administration may need to avoid "multi-front fires" in the Asia-Pacific region, further impact its own election results, and maintain a balance in its China policy.

(2) In the long run, in addition to the short-term results of the U.S. election, we should observe the changes in the U.S. social base and domestic and foreign policy tendencies through the U.S. election, and then infer its long-term impact on the global situation. On the one hand, the systematic decline in the credibility of the United States' commitment to global issues, coupled with the increased demand for strategic independence of third-party countries, will create new opportunities for mainland diplomatic breakthroughs and Chinese enterprises going overseas. On the other hand, the global power vacuum and order imbalance brought about by the decline of US control will also make local geopolitical conflicts frequent and persistent.

▍Risk factors:

uncertainty over the outcome of the U.S. election; The U.S. economy has deteriorated more than expected; The geopolitical game between China and the United States has intensified more than expected.

The views expressed in this article are solely those of the author.