Markets are contending with greater uncertainty around the US presidential election following President Biden’s withdrawal. Our Global Head of Fixed Income and Thematic Research breaks down what we know as the campaign enters a new phase.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the latest development in the US presidential race.It's Thursday, July 25th at 2:30 pm in New York. Last weekend, when President Biden decided not to seek re-election, it begged some questions from investors. First, with a new candidate at the top of the ticket, are there new policy impacts, and potential market effects, resulting from Democrats winning that we haven’t previously considered? For the moment, we think the answer is no. Consider Vice President Harris. Her policy positions are similar to Biden’s on key issues of importance to markets. And even if they weren’t, the details of key legislative policies in a Democratic win scenario will likely be shaped by the party’s elected officials overall. So, our guidance for market impacts that investors should watch for in the event that Democrats win the White House is unchanged. Second, what does it mean for the state of the race? After all, markets in the past couple of weeks began anticipating a stronger possibility of Republican victory. It was visible in stronger performance in small cap stocks, which our equity strategy team credited to investors seeing greater benefits in that sector from more aggressive tax cuts under possible Republican governance. It was also visible in steeper yield curves, which could reflect both weaker growth prospects due to tariff risks, pushing shorter maturity yields lower, and greater long-term uncertainty on economic growth, inflation, and bond supply from higher US deficits – something that could push longer-maturity Treasury yields relatively higher. So, it's understandable that investors could question the durability of these market moves if the race appeared more competitive. But the honest answer here is that it's too early to know how the race has changed. As imperfect as they are, polls are still our best tool to gauge public sentiment. And there’s scant polling on Democratic candidates not named Biden. So, on the question of which candidate more likely enjoys sufficient voter support to win the election, it could be days or weeks before we have reliable information. That said, prediction markets are communicating that they expect the race to tighten – pricing President Trump’s probability of regaining the White House at about 60-65 per cent, down from a recent high of 75-80 per cent. So bottom line, a change in the Democratic ticket hasn’t changed the very real policy stakes in this election. We’ll keep you informed here of how it's impacting our outlook for markets. Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

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