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Donald Trump’s coronavirus diagnosis poses an unsettling new challenge for both nervous markets and a slowing U.S. recovery.

Investors and political analysts had already braced themselves for the possibility of a disputed election on Nov. 3. Many see a significant possibility that Mr. Trump will challenge the results in court if he loses the ballot count, as polls suggest he will.

The news that he has tested positive for COVID-19 ratchets the uncertainty even higher. It suggests the run-up to the election could be just as unpredictable as whatever comes after.

At the very least, the U.S. President’s diagnosis is likely to seed doubts about whether it is wise to push ahead on plans to reopen the U.S. economy.

For several months, Mr. Trump has scoffed at wearing a mask. He has repeatedly minimized the threat from the novel coronavirus while urging states to quickly reopen. His diagnosis, announced early Friday, offers a case study in the pitfalls of that approach.

“At a minimum, the news undercuts Trump’s key campaign message on defeating the virus and reopening the economy,” Michael Pearce, chief U.S. economist at Capital Economics, wrote in a note.

Joel Naroff of Naroff Economics made a similar point: “The political and therefore business dynamic of saying that the virus is under control and that businesses, such as restaurants, can reopen fully may change now that the President has contracted the virus.”

Any slowdown in reopening would add to growing economic headwinds. A jobs report on Friday morning fell short of analysts' expectations and underlined the weakening pace of the U.S. recovery.

“The rate of improvement has clearly slowed, as the resurgence of the virus has constrained the pace of reopening and the early signs for October are not encouraging,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

In Congress, Democrats and Republicans are deadlocked over how much new fiscal stimulus to deliver. The chance of a stimulus package being passed in the days to come has now fallen to less than three in 10, according to Citigroup analysts.

Mr. Trump’s effective absence from the scene, owing to quarantine, may further reduce the odds of strong action on the stimulus front. But much depends on the severity of his case.

As an overweight 74-year-old man, Mr. Trump is in a higher risk category. However, the odds strongly favour his recovery. In Canada, for example, only one in five COVID-19 patients in their 70s have required hospitalization.

Markets gyrated on Friday as investors mulled Mr. Trump’s diagnosis, the lacklustre jobs numbers and stalled negotiations on new fiscal stimulus. The S&P 500 index of large U.S. stocks closed down almost 1 per cent, while the tech-heavy Nasdaq lost 2.2 per cent and oil prices tumbled 4.3 per cent.

Prediction markets, in which participants buy and sell shares tied to future events, had a muted reaction to Mr. Trump’s diagnosis. Investors in PredictIt, the best-known prediction market, continue to see Democratic rival Joe Biden as the runaway favourite to win the presidential election, putting the odds of a Biden victory at 63 per cent.

Mr. Biden is the overwhelming favourite among pollsters, too. Nate Silver, the noted U.S. elections expert and founder of the widely followed website, pointed out earlier this week that Mr. Trump was trailing Mr. Biden by seven to eight percentage points in national polls. That put him further behind at this stage of the race than any other presidential candidate since Bob Dole in 1996.

Prior to the President’s diagnosis, Mr. Silver’s computer models gave Mr. Trump only a 21-per-cent chance of winning re-election. In an online chat on Friday, Mr. Silver reiterated the long odds against the Republican candidate. “The President’s re-election bid was in DEEP trouble going into this, at least by conventional measures,” he wrote. “And the smattering of post-debate polls we’d gotten had been particularly bad for him.”

The biggest immediate effect of the President’s diagnosis has been to bolster the perceived chances of a Democratic sweep of the presidency, the U.S. Senate and House of Representatives. The odds of a Democratic sweep on PredictIt jumped in the hours after the President’s diagnosis and are now around 60 per cent.

Many investors fear a Democratic Congress would hike taxes, expand medical coverage in ways that hurt health care stocks, as well as impose tighter restrictions on energy companies. However, some observers believe a second Trump term could threaten markets in other ways.

Catherine Mann, global chief economist at Citibank, argued in a recent report that Mr. Trump is the riskier choice in the presidential sweepstakes. If he is re-elected, she wrote, “markets should expect continued policy unpredictability, potential expansion of trade wars and continued social fragmentation and political polarization.”

Mr. Pearce of Capital Economics thinks a Democratic sweep could be positive for investors by breaking the existing congressional gridlock and opening the gates to a large wave of postelection fiscal stimulus. “We think that would be more likely if Biden wins in November and Democrats win back control of Congress,” he wrote.

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