Bank of England pulls QE lever, Biden close to victory

Morning Note

Easing ain’t as easy as it looks: The Bank of England increased its programme of government bond purchases by an additional £150bn.

This was more than the market was expecting and took the total stock of government bond purchases to £875 billion.

That said, the BoE had pretty well telegraphed this move yesterday when it decided to bring the decision forward from 12 noon to 7am – most pundits assumed that this meant a monetary policy decision of note that the BoE didn’t want to get entangled with the chancellor’s latest pandemic statement.

Interest rates were kept at 0.1% and the MPC voted 9-0 for the measures. There was no talk of negative rates, just mention of the risks to the currency being to the downside. That may be, but sterling rallied as there was no surprise rate cut and no mention of plans to take rates negative.

GBPUSD rose sharply from 1.2940 to above 1.30 after the announcement, eyeing near-term resistance peaks at 1.3050 and then the 1.3140 high at the peak of the ‘blue wave’ dollar selling on election night before the results showed a much tighter race than polls indicated.

Trump’s election chances hang by a mainly legal thread now that Joe Biden has secured Wisconsin and Michigan. Nevada resumes counting today with Biden having a tiny lead in the state and 25% of the vote yet to count – you think this would favour the Democrat.

Meanwhile, NBC projects that Nebraska’s 2nd Congressional District will swing it for Biden. Legal challenges from Trump are incoming in Wisconsin and Georgia but unlikely to be a material drag – excluding some attempts to block counts and question the validity of some ballots, the smooth transition of power was never really in doubt. But it’s clear there has been no Blue Wave.

The Democrats’ chances of flipping the Senate to Blue appear to have gone, though counting continues. America remains as divided as ever, with a Blue White House needing to work with a Red Senate, some of the more extreme tendencies of the Democrats will be handicapped. The worst of the volatility is behind and while we need to get through these legal challenges, a return to a Blue White House and Red Senate may result is a calmer policy situation (fingers crossed!).

It looks almost certain we will get the ‘So Mauve’ outcome from our election playbook (Biden win, Senate stays red). As detailed there, this implies a degree of gridlock in Washington, which ex-stimulus is not always a bad thing for the market:

  • Less uncertainty over policy likely to support equities, particularly Big Tech, whilst a Biden presidency ought to see some degree of a reset with trade partners that would boost sentiment and corporate earnings.
  • Stimulus delays could create near-term volatility, but it would be in no one’s interests to drag their feet for long given any ballot box risk would be two years away.
  • Tax uncertainty removed = +ve for equity valuations, especially Growth
  • Improvement in trade relations with partners and China could see EM supported as well as European equities/currency – would also tend to boost US corporate earnings
  • Not as bad for the dollar as a Blue Wave result with trade reset likely to support flows, also less fiscal expansion a factor, but USD seen weaker in this outcome as part of broader downtrend.

US and European equities rallied Wednesday in the wake of the election and carried through with this positivity. Solid gains of 0.5% registered on the FTSE 100 taking the blue chip index above 5,900 and the trend indicates a push to 6,000.

There is clearly some relief in the markets that the election is (almost) behind us – as I’ve been saying the threat of a ‘crisis’ level disputed election (Trump refusing to leave office) was always overstated and a few days of court decisions won’t matter much for investors with a longer-term horizon, and it’s these flows that are driving things here.

The Blue Wave reflation trade clearly had to unwind – US 10 year yields have retreated to 0.73%, from achieving a multi-month high on election night of 0.945%. Financials fell, with shares in JPMorgan –3% and Bank of America –4%. Lower nominal rates also +ve for gold, with spot to $1,915 in early trade this morning.

Just to highlight how much Tech likes the result (i.e. no Democrat Senate to mess around with regulations and raise taxes, as well as no reflation trade to spark rotation out of growth to value), Nasdaq futures are up 10% from their Monday lows. Amazon and Alphabet jumped 6%, with Apple +4% and Facebook rallying +8%.

NASDAQ Performance